robert w. emerson

EMERSON_9.12 (DO NOT DELETE) 9/12/2018 11:01 AM

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THANKS FOR THE MEMORIES:

COMPENSATING FRANCHISEE GOODWILL AFTER

FRANCHISE TERMINATION

Robert W. Emerson

ABSTRACT

Franchises serve as a potential avenue through which direct investment

can be made into new markets. However, the current state of franchise law

and related concepts such as the franchisor’s or franchisee’s goodwill are

still underdeveloped.

This Article reviews the franchise laws in key jurisdictions throughout

the world. It considers, among other things, the treatment of goodwill upon

termination of the franchisor-franchisee relationship. The Article argues for

reforms, such as mandated pilot units prior to franchising.

Most importantly, this Article proposes the adoption of a presumption

favoring goodwill compensation for the franchisee. The presumption could

be rebutted by express contract provisions and, certainly, by wrongful

behavior on the part of the franchisee, but a clear default standard in favor of

franchisees would lead to a fairer, more efficient approach to franchise

networks and investments.

KEY WORDS: goodwill, compensation, termination,

comparative law, international law

J.D., Harvard Law School. Huber Hurst Professor of Business Law, Warrington College of

Business, and Affiliate Professor, Center for European Studies, University of Florida. Email:

[email protected]. This article was recognized as the winner of the Best

Paper Award at the 2017 annual conference of the International Society of Franchising.


2017] THANKS FOR THE MEMORIES 287

INTRODUCTION ................................................................................. 287 I. SURVEY OF FRANCHISE LAW AND TREATMENT OF GOODWILL 290

A. United States of America ................................................ 290 B. China............................................................................... 296 C. France ............................................................................. 300 D. Brazil .............................................................................. 305 E. Canada ............................................................................ 308 F. Australia ......................................................................... 312 G. Germany ......................................................................... 317 H. India ................................................................................ 321 I. Japan ............................................................................... 323 J. United Kingdom ............................................................. 325 K. Other National Perspectives ........................................... 327

II. CONCLUSIONS AND PROPOSALS ............................................... 328 A. Testing the Business Formula ......................................... 330 B. Protecting the Goodwill .................................................. 331

INTRODUCTION

Vincent: You know what they call a . . . a Quarter Pounder with

Cheese in Paris?

Jules: They don’t call it a Quarter Pounder with Cheese?

Vincent: They got the metric system, they wouldn’t know what the f—-

a Quarter Pounder is.

Jules: What’d they call it?

Vincent: They call it a Royale with Cheese.

Jules: Royale with Cheese. What’d they call a Big Mac?

Vincent: Big Mac’s a Big Mac, but they call it Le Big Mac.

Jules: Le Big Mac. What do they call a Whopper?

Vincent: I dunno, I didn’t go into a Burger King.**

Franchising is a very common form of business expansion for

companies both in the United States and abroad. In the United States alone,

franchising “creates 21 million jobs at 900,000 locations nationwide and

contributes $2.3 trillion in economic output annually.”1 While U.S. franchise

law is far from uniform,2 the federal and state laws describe a franchise in

* * PULP FICTION (Miramax Films 1994).

1. Susan A. Grueneberg & Jonathan C. Solish, Franchising 101: Key Issues in the Law

of Franchising, 19 BUS. L. TODAY, no. 4, Mar./Apr. 2010, at 11.

2. See generally 20 PAUL J. GALANTI, INDIANA PRACTICE, BUSINESS ORGANIZATIONS §


288 U. OF PENNSYLVANIA JOURNAL OF BUSINESS LAW [Vol. 20.2

terms of three elements3: (1) the business is “substantially associated with

the franchisor’s trademark”; (2) the franchisee pays the franchisor a fee or

series of fees for the right to operate the business; and (3) one of the

following: (a) the franchisor prescribes a marketing plan, (b) the parties are

interdependent and share a financial interest (the “community of interests”

standard), or (c) the franchisor exerts significant control over the business.4

If a business relationship fulfills all three elements, it is a franchise by law.5

Other countries define franchises by these elements as well. Some

countries define a franchise using only two out of three elements or a

variation thereof, but the definition remains similar throughout the world.

Most countries do not require a franchisor to test the business plan or concept

before offering a franchise to a prospective franchisee.6 There are some

notable exceptions, however, such as China.7

One of the more debated issues in franchise law concerns which party,

the franchisor or the franchisee, owns the business goodwill at the

termination of the franchise agreement.8 In other words, does the goodwill

of the business, the franchise’s reputation vis-à-vis its customer,9 stay with

54.4 (2009) (focusing on Indiana franchise law, and noting that different states may have

different registration and/or disclosure laws).

3. Grueneberg & Solish, supra note 1, at 11.

4. Id. at 11–12. This last element will vary by jurisdiction. Id. The marketing plan

applies in California and most other states. Id. Some states use the “community of interests”

standard. Id. The FTC uses the significant control standard. Id. at 12.

5. IND. CODE ANN. § 23-2-2.5-1 (West 2015); MINN. STAT. ANN. § 80C.01 (West 2016).

6. Some such nations with no testing requirement, as discussed infra, are Australia,

Canada, India, Japan, and the United States. See infra notes 29, 164, 195, 249, 264 and

accompanying text.

7. See infra note 74 (including a “mature business plan” as one of the requirements a

franchisor must meet).

8. See, e.g., Robert W. Emerson, Franchise Goodwill: “Take a Sad Song and Make it

Better,” 46 U. MICH. J.L. REFORM 349 (2013) (proposing a standard for reducing the major

stresses of a franchise relationship by quickly and fairly resolving the ownership of goodwill);

Benjamin A. Levin & Richard S. Morrison, Who Owns Goodwill at the Franchised Location?,

18 FRANCHISE L.J. 85 (1999) (examining who is entitled to protect the value of local goodwill

when a franchise relationship ends); Clay A. Tillack & Mark E. Ashton, Who Takes What:

The Parties’ Rights to Franchise Materials at the Relationship’s End, 28 FRANCHISE L.J. 88,

124–25 (2008) (discussing who owns the local goodwill associated with a particular

franchised location and who is entitled to payment for it when a franchise agreement

terminates).

9. In franchising:

[A] well-recognized and respected trademark can become a business asset of

incalculable value, usually referred to as goodwill[, which] develops as a result

of favorable consumer recognition and association. Trademark law is designed

to protect business goodwill by protecting consumers from confusing various

producers of goods or providers of services.

Christopher P. Bussert & Linda K. Stevens, Trademark Law Fundamentals and Related



the franchisor upon termination or does the franchisee deserve compensation

for building up the goodwill during the contract term (local goodwill)?

Goodwill is usually defined as:

[T]he advantage or benefit, which is acquired by an establishment, beyond the mere value of the capital, stock, funds, or property employed therein, in consequence of the general public patronage and encouragement, which it receives from constant or habitual customers, on account of its local position, or common celebrity, or reputation for skill or affluence, or punctuality, or from other accidental circumstances, or necessities, or even from ancient partialities, or prejudices.

10

Courts in different countries will give varied treatment to goodwill upon

termination. Some courts hold that the goodwill always remains with the

franchisor.11

Others recognize the franchisee’s right to full or partial

compensation based on goodwill.12

Even though this issue is very important

for international franchising, the ownership of and compensation for

goodwill has yet to be explored in many countries.13

This failure to consider

and regulate franchise goodwill is especially striking inasmuch as the

principles of agency law established in most of these nations might well

apply.14

Part I of this Article surveys the existing franchise laws of a broad range

of about a dozen nations worldwide. For each country, Part I’s discussion

considers (a) the governing franchise laws and definitions in the country and

whether business formula testing is required for the franchisor to sell the

Franchising Issues, in FUNDAMENTALS OF FRANCHISING 1, 6 (Rupert M. Barkoff et al.

eds., 4th ed. 2015).

10. JOSEPH STORY, COMMENTARIES ON THE LAW OF PARTNERSHIP AS A BRANCH OF

COMMERCIAL AND MARITIME JURISPRUDENCE, WITH OCCASIONAL ILLUSTRATION FROM THE

CIVIL AND FOREIGN LAW § 99, at 139 (1841).

11. See infra Parts E.2. (stating that goodwill compensation to a franchisee is not

recognized in Canada) & I.2. (showing that goodwill compensation is generally not awarded

in Japan).

12. See infra Parts C.2. (France), D.2. (Brazil), F.2. (Australia), G.2. (Germany) & H.2.

(India) (indicating that goodwill compensation has been recently recognized in at least one

case in each of these countries).

13. See infra Parts B 2 (stating that China does not recognize goodwill beyond what was

provided for in the franchise contract) & J.2 (finding that courts in the United Kingdom have

yet to award franchisee goodwill).

14. Compare Inga Karulaityte-Kvainauskiene, Lithuania: Court of Appeal of Lithuania

passed an important ruling in a case related to commercial agency, INT’L DISTRIBUTION INST.,

Oct. 20, 2015 (citing a Lithuanian case where goodwill compensation was awarded based on

agency principles) with Peter Gregerson, Denmark: No compensation to a Danish distributor

upon termination, INT’L DISTRIBUTION INST., Feb. 16, 2011 (citing a Danish case that did not

award goodwill compensation in a distributorship agreement despite an agency relationship

because the distributor was not an exclusive distributor).



franchise and (b) how goodwill is treated at the end of a franchise

relationship. Part II recommends the adoption of a consistent standard for

franchise law and the uniform treatment of goodwill to increase efficiency

in franchise investments and operations.

I. SURVEY OF FRANCHISE LAW AND TREATMENT OF GOODWILL

A. United States of America

1. Business Formula

The United States was the first country to adopt franchise laws when

the State of California passed the California Franchise Investment Law in

1971.15

The United States does not have a uniform definition of what a

franchise is across all fifty states.16

Numerous states as well as the Federal

Trade Commission (FTC) have adopted franchise disclosure laws,17

with

some states requiring a filing or registration and some states even having

substantive requirements.18

Of the states that have adopted franchise laws,

most share certain baseline requirements, including the substantial

association with a trademark, payment of a fee, and a franchisor-designed

marketing plan.19

Still, states often apply a variety of standards to determine

if a franchise relationship exists.20

A few states, including New York, only

require a franchise fee and either a marketing plan or use of a trademark.21

Due to this lack of uniformity, “the definition in each applicable law or

15. Susan A. Grueneberg & Jonathan C. Solish, Franchising 101: Key Issues in the Law

of Franchising, 19 A.B.A. BUS. LAW SEC. 4 (Mar./Apr. 2010), available at

http://apps.americanbar.org/buslaw/blt/2010-03-04/grueneberg-solish.shtml

[https://perma.cc/DS2F-9WJM] (explaining the basic legal framework of franchising in the

United States).

16. John R.F. Baer & Susan Grueneberg, United States, in INTERNATIONAL FRANCHISE

SALES LAWS 499, 503 (Andrew P. Loewinger & Michael K. Lindsey eds., 2d ed. 2015).

17. See Robert W. Emerson, Franchise Contract Interpretation: A Two-Standard

Approach, 2013 MICH. ST. L. REV. 641, 661 (2013) (outlining the federal and state franchise

disclosure requirements); Baer & Grueneberg, supra note 16, at 503-07 (detailing federal and

state disclosure and registration laws and highlighting state registration laws, such as in

California and New York).

18. See Robert W. Emerson, Franchise Terminations: “Good Cause” Decoded, 51

WAKE FOREST L. REV. 103, 106 n.18, 108-10 (2016) (delineating the states with laws

specifically on franchising and also detailing how state franchise laws require “good cause”

before a franchisor can terminate a franchise); Emerson, supra note 17, at 662 n.121 (citing

the laws of 19 states as well as some territories that govern the franchise relationship rather

than simply the disclosures and registrations before a franchise may be granted).

19. Grueneberg & Solish, supra note 15.

20. Id.

21. Id. at 12.



regulation must be reviewed by a franchise seller . . . .”22

Even though the FTC rules for franchises apply in all fifty states, state

franchise law can preempt the federal law.23

As such, the FTC mandates a

floor level of protection for franchises, which can only be enhanced by any

applicable state law provisions.24

The FTC defines a franchise as a continuing commercial relationship

where the franchise seller, orally or in writing, promises:

That the franchisee will have the right to operate a business identified by the franchisor’s trademark, or to offer, sell, or distribute goods or services with the franchisor’s trademark; That the franchisor can exert significant control over the franchisee’s method of operation or provide significant assistance in the same; And that before commencing operations as a franchisee, the latter is required to make payment or commit to make a payment to the franchisor.

25

All elements must be present for a business relationship to be

considered as a franchise. The absence of just one element precludes the

business from franchise classification.26

However, it is possible for a relationship to be considered a franchise

under the FTC, but not treated as a franchise under state law when lacking

an additional element required under a state law; or vice versa.27

Likewise,

a business relationship may be a franchise in one state, but not qualify as one

in another state.28

Furthermore, there is no requirement in the United States

22. Baer & Grueneberg, supra note 16.

23. Id.; see also John R.F. Baer, Overview of Federal and State Laws Regulating

Franchises, Distributorships, Dealerships, Business Opportunities and Sales Represent-

atives, UNIDROIT 2 (March 14, 2012), http://www.unidroit.org/english/guides/200

7franchising/country/usa.pdf [https://perma.cc/6JAL-LWTM] (“The Amended FTC Franc

hise Rule does not preempt the state disclosure laws, except to the extent that the state laws

are inconsistent.”).

24. Baer & Grueneberg, supra note 16, at 529-31; see also 16 C.F.R. § 436 (2007)

(stating that a law is not inconsistent with Part 436 if it affords prospective franchisees equal

or greater protection than that provided by Part 436, such as registration of disclosure

documents or more extensive disclosures).

25. 16 C.F.R. § 436.1(h) (2007).

26. See Baer & Grueneberg, supra note 16, at 506-07; FEDERAL TRADE COMMISSION,

FRANCHISE RULE 16 C.F.R. PART 436 COMPLIANCE GUIDE 1 (May 2008), https://www.ftc.go

v/system/files/documents/plain-language/bus70-franchise-rule-compliance-guide.pdf

[https://perma.cc/N4K3-KN5M] (“A business arrangement described as a ‘franchise’ will not

be covered unless it meets the three definitional elements in the amended Rule.”).

27. Baer & Grueneberg, supra note 16, at 503.

28. Id.; Lauren Fernandez, Timothy O’Brien, & Felicia N. Soler, Disclosure Basics

Under Federal and State Franchise Laws, 18 (May 2013).

“The fifteen states featuring their own franchise disclosure laws are California,



for the franchisor to test a franchise concept “before offering it for sale.”29

2. Goodwill

Goodwill treatment by American courts varies significantly dependent

upon the state in which the case is brought. Resolving who owns the

goodwill after termination of the franchise contract presents a dilemma that

is best characterized as follows: “On the one hand, the franchisor has

provided the trademarks that the location’s customers recognize. But on the

other hand, the franchisee’s efforts hopefully have improved the brand’s

goodwill and may even have developed goodwill that is unique to that

specific location.”30

At the federal level, the goodwill associated with a trademark belongs

to the franchisor.31

In comparison, state law diverges into separate

categories; some states require franchisors to pay the franchisee for local

goodwill generated during the life of the contract while others require

Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North

Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington and

Wisconsin. Of those fifteen states, all but Oregon are so called

“registration/disclosure states” because they also require a pre-sale filing with

the state. In California, Hawaii, Illinois, Maryland, Minnesota, New York, North

Dakota, Rhode Island, Virginia, and Washington, a franchisor must first register

itself and its FDD, a daunting task for the uninitiated, before any franchise

advertising appears, any franchise offers are made or any franchise sale is

affected. In Indiana, South Dakota and Wisconsin, only a “notice filing” and

dissemination of the FDD is required; that document is not reviewed prior to use.

Michigan requires only the filing of a Notice of Franchise Offering. And, as

stated above, under Oregon law, only disclosure is mandated, without any prior

registration.”

Id.

29. Carl E. Zwisler, Country Report United States: Franchising, INT’L DISTRIBUTION

INST. 41-42 (last updated November 7, 2014). Although there is no requirement to use the

business formula, it has been suggested that doing so leads to greater success since what the

franchisor is ultimately selling “is a ‘system’ or part of one’s ‘business expertise’ and the

proven track record of a product.” John W. Wadsworth, United States, in 2 INTERNATIONAL

FRANCHISING U.S.-1/6 (Dennis Campbell ed., 2005). This would presumably apply not only

in the United States but in other countries as well.

30. Tillack & Ashton, supra note 8, at 124.

31. Kerry L. Bundy & Robert M. Einhorn, Franchise Relationship Laws, in

FUNDAMENTALS OF FRANCHISING 183, 216 (Rupert M. Barkoff et al. eds., 4th ed. 2015). This

is derived from the Lanham Act, the federal trademark act that states that in a trademark

license agreement the goodwill is owned by the licensor. “To the extent that the franchisee is

a licensee of the franchisor, the goodwill associated with the license trademarks is owned by

the franchisor[.]” Thomas M. Pitegoff & W. Michael Garner, Franchise Relationship Laws,

in FUNDAMENTALS OF FRANCHISING, 212 (Rupert M. Barkoff & Andrew C. Selden eds., 3rd

ed. 2008).



compensation for loss of goodwill in cases of wrongful termination.32

The

statutes of Delaware, Indiana, Minnesota, Mississippi, Missouri, Nebraska,

New Jersey,33

and Virginia all fall under the second category.34

These states

do not require repurchase of the goodwill by the franchisor upon termination

unless the franchisor violates the agreement of the relevant franchise laws.35

If repurchase is required, then goodwill compensation would be included in

a franchisee’s damages against the franchisor in a lawsuit.36

In contrast, the franchisor must pay the franchisee for the local goodwill

the franchisee helped create during the relationship in only three states37

:

Hawaii,38

Illinois,39

and Washington.40

Aside from tangible goodwill, these

statutes generally require compensation for goodwill when either the

franchisor benefits from the franchisee’s goodwill or when the franchisee is

precluded from benefiting from its goodwill because of an enforceable non-

compete agreement.41

If the franchisee is released from the non-compete

agreement or the franchisor does not operate in the same location as the

previous franchisee, these statutes are unclear regarding whether the local

goodwill benefits the franchise at the national level, leaving these

determinations to the common law.42

The Hawaii, Illinois, and Washington statutes apply only under limited

circumstances. First, the Hawaii statute limits the goodwill payment

requirement by restricting it to instances where the franchisor refuses to

renew for the purpose of converting the franchise into a company-owned

32. Tillack & Ashton, supra note 8, at 88.

33. Jiffy Lube Int’l, Inc. v. Weiss Bros., Inc., 834 F. Supp. 683, 692 (D.N.J. 1993)

(“Grounds for irreparable injury include loss of control of reputation, loss of trade, and loss

of goodwill.”) (quoting S & R Corp. v. Jiffy Lube Int’l, Inc., 968 F.2d 371, 378 (3d Cir.

1992)). The court granted a preliminary injunction to protect the goodwill of the franchisor.

Id. at 693–94.

34. Bundy & Einhorn, supra note 31, at 216.

35. Id.

36. Id.; 15 U.S.C. § 1117(a) (2016) (stating that “actual damages” can be in the form of

goodwill and must be proven).

37. Bethany L. Appleby, John Haraldson & Karen C. Marchiano, Life After Termination:

Ensuring a Smooth Transition, INT’L FRANCHISE ASS’N, 5 (2015) (“In addition, the franchise

statutes in Hawaii, Illinois, and Washington require franchisors to pay their former franchisees

for local goodwill generated during the life of the relationship in certain circumstances.”).

38. HAW. REV. STAT. § 482E-6(3) (2016).

39. 815 ILL. COMP. STAT. 705/20 (2016).

40. WASH REV. CODE § 19.100.180(2)(i) (2014).

41. See Craig R. Trachtenberg, Robert B. Calihan & Ann-Marie Luciano, Legal

Considerations in Franchise Renewals, 23 FRANCHISE L.J. 198, 204 (2004) (discussing the

application of the Illinois, Hawaii, and Washington statutes).

42. Id.; Bundy & Einhorn, supra note 31, at 216 (stating various state laws in which a

franchisor may be found liable for damages of goodwill to the franchisee).



outlet.43

The Illinois statute, although it does not specifically use the term

“goodwill,” effectively requires reimbursement of it.44

Specifically, if the

franchisor refuses to renew the franchise agreement, it must pay

compensation to the franchisee “for the diminution in the value of the

franchised business” where: “the franchisee is barred by the franchise

agreement . . . from continuing to conduct substantially the same business

under” a different mark in the same area, or the franchisor did not inform the

franchisee of its intent not to renew at least six months prior to the expiration

date of the franchise agreement.45

Finally, the Washington state statute46

requires payment for goodwill

upon the franchisor’s refusal to renew the franchise agreement unless: “the

franchisee has been given one-year’s notice of nonrenewal,” and “the

franchisor agrees in writing not to enforce any covenant which restrains the

franchisee from competing with the franchisor[.]”47

The Hawaii, Illinois, and Washington statutes might recognize what is

known as sweat equity,48

the goodwill that reflects the going-concern value

of the business, which is separate from the trademark.49

The common law itself is no clearer. Take, for example, two conflicting

federal cases, Lee v. Exxon Co., U.S.A. and Atlantic Richfield Co. v. Razumic.

In Lee, the court determined whether goodwill was part of a sale between the

franchisor and franchisee. Exxon, after deciding not to renew the franchise

43. HAW. REV. STAT. § 482E-6(3).

44. 815 ILL. COMP. STAT. 705/20.

45. Id.

46. The statute was recently reviewed in MetroPCS Pa., LLC v. Arrak, No. C15-

0769JLR, 2015 WL 6738887 (W.D. Wash. Nov. 4, 2015).

MetroPCS, a wireless telephone carrier, sought to enjoin a terminated dealer

from continuing to offer competing products and services, in breach of

noncompetition/nonsolicitation restrictions in the terminated dealer

agreement . . . . The court noted that Washington State law enforces

noncompetition/nonsolicitation restrictions that are reasonably necessary to

protect a franchisor’s business or goodwill, giving special consideration to time

and area restrictions.

Earsa R. Jackson & David Gurnick, ANNUAL FRANCHISE AND DISTRIBUTION LAW

DEVELOPMENTS 34 (2016).

47. WASH. REV. CODE § 19.100.180(2)(i) (2014).

48. Bundy & Einhorn, supra note 31, at 216.

49. See Russell Cohen, What is Goodwill?, MURPHY BUSINESSES BROKER RUSSELL

COHEN (May 19, 2015), http://www.sflabusinesses4sale.com/what-is-goodwill [https://perm

a.cc/37AX-LB2Y] (“Goodwill is often viewed as an approximation of the value of a

company’s brand names, reputation or long-term relationships that cannot otherwise be

represented financially.”). The going-concern value, on the other hand, is the idea that the

business will continue and essentially not go bankrupt. It is the “value of a business for just

being in business[.]” Id.; see also Bundy & Einhorn, supra note 31, at 216 (noting that “sweat

equity” is distinct from the brand and instead “reflects the ‘going-concern’ value of the

franchised business separate from the goodwill associated with the trademark”).



agreement with Lee, offered to sell it back to Lee at the same price as the

highest bid offered in the market.50

Lee sued Exxon claiming that the price

included the goodwill he had built up during the contract period and hence

was too high.51

The court did not find this to be a valid claim.52

Instead, it

observed, “Congress has . . . declared that where a franchisor follows the

provisions of the [relevant franchise/trademark law] . . . , the franchisor may

terminate or non-renew a franchise . . . .”53

The termination or non-renewal

could take place without the franchisor “incurring any liability to the

franchisee, including any payments for the loss of alleged goodwill.”54

In Atlantic, on the other hand, the court ruled in the opposite direction,

declaring that in effect “a franchisee does create goodwill for the

franchise . . . .”55

The court specifically stated that “[u]nlike a tenant

pursuing his own interests while occupying a landlord’s property, a

franchisee such as Razumic builds the goodwill of both his own business and

Arco [(the franchisor)].”56

The court then went on to say that a franchisee

“can justifiably expect that his time, effort, and other investments promoting

the goodwill of [the franchise] will not be destroyed” by the franchisor’s

termination.57

In yet another case, Bray v. QFA Royalties LLC, the court differentiated

between business goodwill, which the franchisees claim they lose if the

franchisor is allowed to terminate the franchise, and trademark goodwill,

which is associated with the franchisor’s brand and can be damaged if the

franchisee continues to operate.58

This distinction implies that the business

goodwill is owned by the franchisee and the trademark goodwill by the

franchisor.59

This is consistent with the concept of sweat equity, implied by

the Hawaii, Illinois, and Washington state statutes.60

50. Lee v. Exxon Co., U.S.A., 867 F. Supp. 365, 366 (D.S.C. 1994).

51. Id. at 368.

52. Id. (“Plaintiff’s ‘goodwill’ theory is not a recognized basis to vitiate or reform the

sale to him.”).

53. Id. In Lee, the relevant trademark law was the Petroleum Marketing Practices Act

(PMPA), 15 U.S.C. §§ 2801-2806 (2006 & Supp. V), which focuses on the termination or

nonrenewal of gas station dealerships. See Emerson, supra note 8 at 362 n.64 (“Principles of

PMPA interpretation may also be applied to non-petroleum franchise cases.”).

54. Lee, 867 F. Supp. at 368.

55. Emerson, supra note 8, at 363.

56. Atlantic Richfield Co. v. Razumic, 390 A.2d 736, 742 (Pa. 1978).

57. Id.

58. Bray v. QFA Royalties LLC, 486 F. Supp. 2d 1237, 1252, 1254–55 (D. Colo. 2007).


60. See supra Part I.A.2; see also Gaylen L. Knack & Ann K. Bloodhart, Do Franchisors

Need to Rechart the Course to Internet Success?, 20 FRANCHISE L.J. 101, 140 (2001) (citing

Computer Currents Publ’g Corp. v. Jaye Comm., Inc., 968 F. Supp. 684 (N.D. Ga. 1999),

where the court found that a franchisee may own goodwill in the form of customer data

collected through the franchisee’s efforts, distinct from the goodwill attributable to the



B. China

1. Business Formula

As Chinese economic power has grown, so too has the Chinese

franchising fervor. There are hundreds of stories of booming franchises –

both foreign-based and domestic – in China, but the tale of KFC is surely

most prominent. In 1987, KFC opened its first store in China.61

Today KFC

operates over five thousand stores in China, serving nearly a thousand

cities.62

However, as of 2016, only 24% of all KFCs in China were

franchised, rather than owned and operated by Yum! Brands Inc., the parent

corporation of KFC.63

By comparison, in the United States, there are

approximately 4,979 KFC units, of which 4,199 stores (over 84%) are

franchised.64

One potential explanation for this discrepancy in terms of the

percentage of franchises versus company-owned units is the more mature

legal and business landscape of franchising in the United States – the

certainty of that law, financing, and marketing, compared to the comparative

infancy of Chinese franchising matters.

It was only after joining the World Trade Organization (WTO) that

China began to reform its franchise law.65

By 2007, the State Council and

the Ministry of Commerce had developed a body of law governing all

commercial franchise activity in China.66

These new laws defined the

franchisor-franchisee relationship for the first time.67

In China, a franchise

is an arrangement whereby: an enterprise contractually grants other

operators the right to use its business operating resources, including

trademarks, logos, patents and know-how; the franchisee conducts business

under a uniform mode of operation (“i.e., one that can be applied to all

aspects such as management, promotion, quality control, interior designs of

franchisor’s trademark).

61. David Bell & Mary L. Shelman, KFC’s Radical Approach to China, HARV. BUS.

REV. 137, 138 (Nov. 2011).

62. Yum! Brands, Inc., Annual Report 4 (Form 10-K) (December 26, 2015).

63. Id.

64. KFC Corporation, INT’L FRANCHISE ASS’N, http://www.franchise.org/kfc-corporat

ion-franchise [https://perma.cc/4P8T-HEDP] (last visited Nov. 3, 2017).

65. Yu Qin & Richard L. Wageman, China, in INTERNATIONAL FRANCHISE SALES LAWS

139, 142 (Andrew P. Loewinger & Michael K. Lindsey eds., 2d ed. 2015).

66. Jue Tang, CHINA: The New Regulations on Franchise, INT’L DISTRIBUTION INST. (Apr.

18, 2007), http://www.idiproject.com/news/china-new-regulations-franchise [https://perma.

cc/2A74-3DPM] (“The text will not repeal the currently in force 2004 Measures on

Administration of Commercial Franchising, but rather the two shall co-exist.”).

67. Ella S.K. Cheong, China, in INTERNATIONAL FRANCHISING CHN/4 (Dennis

Campbell ed., 2d ed. 2016).



stores, and even the arrangement of the brand display board”68

); and “the

[f]ranchisee pays franchise fees according to the agreement.”69

Both

individuals and enterprises can conduct commercial activity as a franchisee;

however, only an enterprise can be a franchisor.70

The Chinese courts have followed the definition set by the State Council

very closely. In 王静 (Wang Jing) v. 北京阳光瑞丽美容有限公司 (Beijing Ruili

Sunshine Beauty Co., Ltd.), the Beijing court determined that the “franchisor

was required to provide a complete management experience, including the

defendant’s technology,” since the parties’ agreement had all the

characteristics of a franchise agreement.71

In another case, the court found

that there was no franchise agreement because the contract did not involve

the licensed use of intellectual property or a unified business model,72

two

important elements of a franchise under Chinese law.

In yet another Beijing case, the court agreed that, since there was no

license to use intellectual property in the parties’ agreement, there was no

franchise agreement, only a sales agency contract.73

Based on these cases, if

any of the critical elements are missing, the courts will find a sales agency

relationship exists instead of a franchise relationship. When all the elements

are present, Chinese courts will enforce the agreement as a franchise and

make the parties comply with the requirements under franchise law.

China requires that before a franchisor can engage in franchising, they

have:

“a mature business model”;

“the capacity to provide a franchisee with operational guidance,

technical support and training services”; and

68. Id. at CHN/5.

69. See Qin & Wageman, supra note 65, at 142 (discussing the definition of a franchise

according to regulations in China).

70. Tang, supra note 66; Shangye Texujingying Guanli Banfa Diqi Tiao

(商业特许经营管理办法第七条) [Administrative Measures on Commercial Franchise, Article 7]

(promulgated by the Ministry of Comm., Dec. 30, 2004, effective Feb. 1, 2005), translated

with WESTLAW CHINA, http://westlawchina.com [https://perma.cc/JE93-GTXP].

71. Paul Jones, Country Report: People’s Republic of China – Franchising, INT’L

DISTRIBUTION INST. § 2.1 (last updated Feb. 2010) (citing Wang Jing, Bei Jing Yang Guang

Rui Li Mei Rong You Xian Gong Si (王静, 北京阳光瑞丽美容有限公司) [Wang Jing v. Beijing

Ruili Sunshine Beauty Co., Ltd.], 朝民初字第17784号 (Beijing Chaoyang Dist. People’s Ct.

2008)).

72. Id. (citing Zhao Bin, Jiang Su Long Li Qi Sheng Wu Ke Ji Gu Fen You Xian Gong

Si (赵斌, 江苏隆力奇生物科技股份有限公司) [Zhao Bin v. Jiangsu Longli Qisheng Biotechnology

Co., Ltd.], 苏中知民终字第0003号 (Jiangsu Province Suzhou City Interm. People’s Ct. Aug. 6,

2008)).

73. Id. (citing Tian Jin Shi Jin Sui Shui Kong Ji Shu You Xian Gong Si, Tai Ji Suan Ji

Gu Fen You Xian Gong Si (天津市金穗税控技术有限公司, 太极计算机股份有限公司) [Tianjin Jinsui

Tax Technology Co., Ltd. v. Taiji Computer Co., Ltd.], 海民初字第25608号 (Beijing Haidian

Dist. People’s Ct. Nov. 17, 2008)).



“at least two directly-operated units operating for more than one year.”74

The last requirement is the “2+1” requirement.75

Any two stores,

whether in China or abroad, can count towards this requirement.76

Franchisor and franchisee are free to contract for territorial exclusivity

in China.77

However, if such a clause is not explicit in the contract, the

franchisee cannot claim the right.78

Neither cases nor legal issues have arisen

in China concerning the duties of the franchisor under such exclusivity

provisions.79

2. Goodwill

Generally, Chinese law “does not provide for compensation beyond

damages” for violations of the franchise agreement.80

The law leaves this up

to the parties to contractually provide such compensation.81

Accordingly,

treatment of goodwill in the specific context of franchising is

underdeveloped in China. Under agency and distributorship principles,

which can apply to franchises, the contract usually provides that the agent

(franchisee) has a right to be paid for goodwill established during the contract

74. Zhongguo Shangye Texu Jingying Guanli Tiali (中国商业特许经营管理条例)

[Regulations for the Administration of Commercial Franchising Operations] (promulgated by

St. Council of the P.R.C., Jan. 31, 2007, effective May 1, 2007), translated in Brad Luo,

Regulations for the Administration of Commercial Franchising Operations–China Franchise

Regulations (I), FRANCHISE ASIA (May 23, 2007, 8:44 AM) (hereinafter, “Commercial

Franchising Operations”).

75. Yanling Ren, China, GETTING THE DEAL THROUGH: FRANCHISE 2013, 47, 49 (Philip

F. Zeidman ed., 2013). See also Paul Jones, People’s Republic of China: The Beijing No. 1

Intermediate Court again interprets the 2+1 Rule as being Administrative only, INT’L DISTRIBUTION

INST. (Mar. 13, 2011), http://www.idiproject.com/news/peoples-republic-china-beijing-no-1-

intermediate-court-again-interprets-21-rule-being [https://perma.cc/5KVL-R44G] (noting

that a franchise contract is not invalid for violating the 2+1 Rule; rather, the franchisor is

subject to an administrative penalty).

76. Ren, supra note 75, at 49. See Robert W. Emerson, Franchisees as Consumers: The

South African Example, 37 FORDHAM INT’L L.J. 455, 470 (“Under prior laws, international

franchisors could only meet the ‘2+1’ requirement by having two franchises that were within

China’s borders for one year, regardless of whether the franchisor had franchises in other

countries. These earlier laws brought franchise expansion in the country to a crawl.”). Thus,

the Chinese authorities replaced them with provisions allowing experienced foreign

franchisors to meet the pilot-units requirement before these franchisors even come to China,

and that has led to more rapid, foreign-based franchise development within China. Id. at 470-

71.

77. Jones, supra note 71, at § 8.1; Qin & Wageman, supra note 65, at 156.

78. Jones, supra note 71, at § 8.1.

79. Id. at 16 (§ 8.2).

80. Id. at 23 (§ 14).

81. PETER JIANG, China, in 1 INTERNATIONAL AGENCY AND DISTRIBUTION LAW CHI-19

(Dennis Campbell ed., 2nd ed., 2017).



period if:

(a) [A]fter the termination, the [franchisor] gains increased profits from the transactions with clients introduced by the [franchisee]; (b) [d]ue to the termination, the [franchisee] cannot get the commissions which are otherwise payable to him based on the contracts signed or to be signed with the clients introduced by the [franchisee]; and (c) . . . it shall be fair and reasonable if the [franchisee] receives compensation.

82

These requirements are consistent with other countries’ agency laws.

Chinese courts also consider other types of regulations, such as whether

the franchisee has improved on the technological know-how of the

franchisor. For example, in a technology transfer agreement, which can and

does apply to the franchise relationship, the parties can contract about

sharing any subsequent improvements resulting from the franchisee using

the technology or know-how of the franchisor.83

If sharing is not stipulated

in the contract or it is unclear, then neither party is entitled to share any

subsequent improvement made by the other party.84

Presumably, this would

mean that the franchisee would not be entitled to a goodwill compensation

fee for any improvements it made that resulted in increased clientele.

Further, under Chinese law, if a franchise relationship consists of a

foreign franchisor85

and a Chinese franchisee, the parties may select non-

Chinese governing law and even a foreign court for litigating disputes.86

Thus, the goodwill laws of other countries could apply to a foreign

franchisor-domestic franchisee relationship. Because of the youth of Chinese

franchise law87

and the frequent use of non-Chinese law through choice-of-

law provisions, cases dealing with franchise goodwill treatment are either

nonexistent or so few they are impossible to find. However, agency law will

82. Id.

83. LIU XIAOHAI, Unfair Competition/Trade Secrets/Know-How, in CHINESE

INTELLECTUAL PROPERTY AND TECHNOLOGY LAWS 127, 140 (Rohan Kariyawasam ed., 2011).

84. Contract Law of the People’s Republic of China (promulgated by the Second Session

of the Ninth Nat’l People’s Cong., March 15, 1999, effective October 1, 1999) at Art. 354.

85. “Foreign franchisor” in this scenario includes not only nationals of other countries

but also parties from Hong Kong, Taiwan, and Macau. Qin & Wageman, supra note 65, at

157.

86. Id. at 157-158. A franchise contract between a Chinese franchisor and Chinese

franchisee is governed by Chinese law. Id.; see also Luo Junming, Choice of Law for

Contracts in China: A Proposal for the Objectivization of Standards and Their Use in

Conflicts of Law, 6 IND. INT’L & COMP. L. REV. 439, 441–42 (1996) (interpreting the Supreme

Court of the People’s Republic of China as providing that parties can agree upon a choice of

law clause in their contracts); Michele Lee, Franchising in China: Legal Challenges When

First Entering the Chinese Market, 19 AM. U. INT’L L. REV. 949, 971 (“Foreign parties to a

contract may choose which law to apply in contractual disputes.”).

87. Supra notes 65-67 and accompanying text.



likely provide the basis for deciding goodwill compensation in China.88

Unlike the mainland, Hong Kong franchise law is much more

developed with respect to addressing goodwill compensation. In Hong

Kong, “the license to use the franchisor’s business format must be subject to

the express condition that all goodwill acquired and reputation established

by the franchisee will accrue exclusively to the franchisor.”89

In other words,

there is no goodwill compensation for the franchisee since all improvements

or local goodwill goes to the franchisor. However, if the franchisee “has

established an earlier reputation in the franchisor’s name in Hong Kong, it

will be difficult for the franchisor to [bring suit for infringement or a claim

of ownership to the goodwill for that matter], and the only option would be

purchase of the [franchisee’s] business and goodwill.”90

C. France

1. Business Formula

France has no set legal framework for what constitutes a franchise.91

One of the earliest French attempts to define franchises was a 1973

administrative order, which described a franchise as an agreement whereby

one party allows another the right to use a trademark to sell products.92

However, this definition is no longer used.93

Rather, the French Franchise

Federation now defines franchises in the same terms as the European Code

of Ethics for Franchising (established by the European Franchise

88. See generally 1 JAMES M. ZIMMERMAN, CHINA LAW DESKBOOK: A LEGAL GUIDE FOR

FOREIGN-INVESTED ENTERPRISES 191-197 (4th ed. 2014) (providing general information on

franchise, retail, wholesale, and commission-based agency operations in China).

89. Ella Cheong & Andrea Fong, Hong Kong, in 1 INTERNATIONAL FRANCHISING LAW,

H.K.-12 (Dennis Campbell ed., 2005).

90. Id.

91. Robert W. Emerson, Franchise Savoir Faire, 90 TUL. L. REV. 589, 613 (2016);

Emmanuel Schulte, France, in GETTING THE DEAL THROUGH: FRANCHISE 62, 64 (Philip F.

Zeidman ed. 2014).

92. See Odavia Bueno Diaz, FRANCHISING IN EUROPEAN CONTRACT LAW: A

COMPARISON BETWEEN THE MAIN OBLIGATIONS OF THE CONTRACTING PARTIES IN THE

PRINCIPLES OF EUROPEAN LAW ON COMMERCIAL AGENCY, FRANCHISE AND DISTRIBUTION

CONTRACTS (PEL CAFDC), FRENCH AND SPANISH LAW 48 (2008).

In a decision of 1973, the Tribunal de Grand Instance of Bressuire defined

franchising as a contract where one undertaking licenses to other independent

undertakings in exchange for remuneration, the right to use the franchisor’s

registered name and trademark to sell products and services. This agreement

generally implies the provision of technical assistance.

Id.

93. Id.



Federation94

), requiring the following elements for a franchise: a system of

marketing goods/service/technology, based upon a close, ongoing

collaboration, whereby the franchisor grants to the franchisee the right to

conduct business in accordance with the franchisor’s concept; the right

entitles the franchisee to use the franchisor’s “trade name, and/or trademark

and/or service mark, know-how, business and technical methods, procedural

system . . . and/or intellectual property rights . . . .”95

This definition is taken

into consideration by French courts.96

Although there is no explicit legal requirement in France to test the

franchise formula prior to offering a franchise for sale, the requirement is

implied.97

Régulation R330-1 of the French Commercial Code states that a

franchisor must disclose “ainsi que toutes indications permettant d’apprécier

l’expérience professionnelle acquise par l’exploitant ou par les dirigeants.”98

Restated in English, the franchisor must disclose the information necessary

to assess the experience gained by the managers or other directors of the

enterprise.99

Furthermore, case law describes a franchise as a reiteration of

commercial success.100

The franchisor must then be able to prove, before

selling a franchise, “that it has operated at least one similar commercial

business, in a manner and for the time necessary to consider such business

as a success.”101

Under French law, parties entering into a franchise agreement are

permitted to include an exclusivity provision.102

However, the franchisee is

94. European Code of Ethics for Franchising, POLISH FRANCHISE ORGANIZATION,

http://franchise.org.pl/code-of-ethics (last visited Jan. 29, 2017).

95. Id. (emphasis omitted).

96. Schulte, supra note 91, at 65.

97. Didier Ferrier, Country Report France: Franchising, INT’L DISTRIBUTION INST. 5

(last updated Dec. 2012).

98. CODE DE COMMERCE [C. COM.][COMMERCIAL CODE] art. R330-1 (Fr.), available at

http://www.legifrance.gouv.fr/affichCodeArticle.do?cidTexte=LEGITEXT000005634379&i

dArticle=LEGIARTI000006266469&dateTexte=&categorieLien=cid

[https://perma.cc/B5HG-AA2J].

99. Id.

100. Didier Ferrier & Nicolas Ferrier, DROIT DE LA DISTRIBUTION 387-388 & 391 (7th ed.

2014).

101. Id.

102. Didier Ferrier, Country Report France: Franchising, INT’L DISTRIBUTION INST. 8

(last updated Dec. 2012); Olivier Binder Granrut, What is the Impact of the New Contract Law

and the Macron Act on Franchise Agreements? 3 (2016).

Franchise agreements, related agreements and any distribution agreement that

includes an exclusive or quasi-exclusive clause, are subject to Article L.341-1 of

the French Commercial Code, which provides that “all contracts (i) concluded

between a person making available to an operator of a retail business a trade

name, a trademark or a store brand in consideration of an exclusive/quasi-

exclusive commitment and (ii) “the shared purpose of which is the operation of

one or several retail outlets which include clauses which are liable to limit the



not entitled to exclusivity as a legal right.103

If such a provision is included,

obligations include similar restrictions as those in other countries- mainly

that the franchisor is not permitted to sell directly in the territory or appoint

another franchisee to that territory.104

In 2006, the Cour de Cassation,

France’s supreme court for judicial matters, decided that direct Internet sales

by other franchisees to customers in the exclusive territory are not a violation

of an exclusivity provision.105

2. Goodwill

Until recently under the French system, the goodwill in a franchise

remained with the franchisor.106

Unless there are contractual provisions

stating otherwise, “all technology, know-how, and other industrial property

rights remain the property of the franchisor after termination of the

contract . . . .”107

However, as early as 2000, France began to recognize the

franchisee’s right to goodwill. For example, in Sarl Nicogli Le Gan Vie SA

(2000), the Paris Court of Appeals ruled that goodwill belongs to the

franchisee and is independent of the franchisor’s goodwill, holding that “the

party that would risk and suffer financial loss by losing the goodwill owned

it in the first place.”108

This holding demonstrates the viewpoint that

freedom of the outlet’s operator to carry on his business”, shall all have the same

expiry date.

Id.

103. Ferrier, supra note 97, at 8; see also Robert W. Emerson, Franchise Encroachment,

47 AM. BUS. L. J. 191, 208 n.75 (2010) (noting a 2002 decision of France’s highest court of

ordinary jurisdiction that franchisees cannot expect territorial protections unless stipulated in

the franchise agreement).

104. Ferrier, supra note 97, at 8; But see CA Paris, July 3, 2013, Odysseum c/ Le Polygone

no. 11/17161 (holding that exclusivity clauses are not entirely sheltered from the application

of competition laws).

105. Id.; see also Robert W. Emerson, Franchise Territories: A Community Standard, 45

WAKE FOREST L. REV. 779, 792 n. 56 (2010) (“The contract also should directly address

nontraditional methods of marketing and distribution—possible encroachment via dual-

branding and Internet sales, for example.”).

106. KPMG, Taxation of Cross-Border Mergers and Acquisitions, 3 (2014) https://hom

e.kpmg.com/content/dam/kpmg/pdf/2014/05/france-2014.pdf [https://perma.cc/3AGV-

3QLF].

Under French tax rules, goodwill, which is considered an intangible asset,

generally cannot be amortized except by the creation of a provision, subject to

strict conditions. The value of the goodwill is included in the net worth of the

company. If goodwill is transferred, it must be included in the recipient

company’s accounts.

Id.

107. Robin T. Tait, France, in SURVEY OF FOREIGN LAWS AND REGULATIONS AFFECTING

INTERNATIONAL FRANCHISING France-11 (Philip F. Zeidman ed., 2d ed. 1990).

108. Pierre-François Veil, A Question of Goodwill, INTERNATIONAL LAW OFFICE (Oct. 23,



goodwill is no longer a singular aspect of the franchise system. Instead, the

franchisor’s goodwill encompasses the regional, national, or international

scale; whereas the franchisee has its own local goodwill.109

By 2002, the idea that goodwill was not just the sole property of the

franchisor had taken root.110

The Cour de Cassation in March 2002 decided

a case that involved a lessor who refused renewal of a franchisee’s

commercial lease because the franchisee did not indicate that it had its own

clientele.111

The court ruled that while “the franchisor is the owner of the

national clientele,” the local clientele belonged to the franchisee.112

More

specifically, the court decided, on the one hand, that if the clientele at the

national level attaches to the fame of the franchisor’s trade name, then, on

the other hand, the local clientele exists only due to the planning and

execution of efforts by the franchisee. The franchisee owns and controls

local elements of the goodwill, the materials and stocks, and the intangible

element that is the commercial lease; the franchisee’s clientele is part of the

franchisee’s goodwill, because even if the franchisee does not own the mark

and the trade name it used while making and performing the franchise

contract, the franchisee created goodwill through its activity (with methods

and behavior that the franchisee put in place at its own risk). Therefore, the

“franchisees were the owners of the goodwill on the local scale.”113

Unfortunately, since landowners continue to ignore the goodwill rights of

franchisees, these franchisees continue to run into difficulties when renewing

their leases.114

2001).

109. Id.

110. Robert W. Emerson, Franchise Contracts and Territoriality: A French Comparison,

3 ENTREPRENEURIAL BUS. L.J. 315, 344 (2009).

111. Id. at 345 n.128. In France, “the right to renew a lease may only be claimed by the

owner of the business that is carried on at the premises.” CODE DE COMMERCE [C. COM.] art.

L. 145-8, translated in THE FRENCH COMMERCIAL CODE IN ENGLISH 68 (Philip Raworth,

2009). This has been interpreted as the owner of the goodwill. Emerson, supra note 110, at

345 n.127.

112. Id. at 345.

113. Id.

114. Id.; Civ. 3: Bull. 2002 III No. 77 P.66 Application for review no., 00-20732 Case

Trévisan v. Basquet.

[H]aving rightly found that, (i) on the one hand, while from the national point of

view goodwill (‘clientèle’) is attached to the notoriety of the name of the

franchisor, locally goodwill (‘clientèle’) exists only by reason of the means

employed by the franchisee, among which are the corporeal elements of his

business (‘fonds de commerce’), the equipment and stock, and the incorporeal

element which is the lease (ii) this goodwill (‘clientèle’) is itself part of the

business (‘fonds de commerce’) of the franchisee, since, even if he is not the

owner of the name and the trade mark put at his disposal during the performance

of the contract of franchise, it is created by his activity by means which he



The concept that the franchisee owns the local goodwill has led to other

developments in franchise law, mainly that franchisees can transfer the local

goodwill.115

As a result, most franchising contracts involve a clause de

preference, or preference clause, whereby the franchisee agrees to grant the

franchisor preemptive rights, similar to a right of first refusal, if and when

the franchise decides to sell the goodwill.116

If the franchisor refuses, then

the franchisee is free to transfer the right to anyone.117

Franchisors can contractually protect themselves from this situation in

multiple ways, such as by including both a preference clause and an

agreement clause in their contracts.118

This means that the franchisor still

has a preemptive right to buy the franchisee’s local goodwill, but can also

authorize which third party the local goodwill is transferred to and can ensure

that the third party is governed by the franchise contract.119

Another option

is a Clause de libre-circulation, sous condition résolutoire de performance

(free circulation clause, under termination if unsatisfactory performance).120

Under this clause, the franchisee can freely transfer the goodwill, but the

franchisor is given several months to evaluate the third party purchaser.121

If

the franchisor is unsatisfied, the transfer is invalid.122

exploits at his own risk, since he contracts personally with suppliers or lenders,

(iii) on the other hand the franchisor recognised that the Basquet spouses had the

right to dispose of the elements which made up their business (‘fonds de

commerce’), the Court of Appeal rightly deduced that the tenants had the right

to claim the payment of an indemnity for eviction, and for these reasons alone,

justified in law its decision on this point . . . .

Id.


116. Id. at 346; see also Cour de cassation [Cass.] [supreme court for judicial matters],

Mar. 23, 2010, Bull. civ. III, No. 77, p. 66 (Fr.) (ruling that a franchise contract does not

exclude the existence of goodwill owned by the franchisee).

117. Emerson, supra note 110, at 346. This was affirmed in a 2005 French appellate court

decision where the franchisor did not exercise its preemptive rights and the franchisee

proceeded to sell the goodwill to a third party. Id. When the third party did not follow the

franchise contract’s requirements, the franchisor sued. Id. The court ruled that the contract

was terminated when the goodwill was transferred and the only available recourse to the

franchisor was to sue the original franchisee for damages. Id. The third party was not liable

to the franchisor. Id.

118. Id. at 346-347.

119. Id. at 347. For more information on agreement and preference clauses, see generally

Franҫois-Luc Simon, Le Contrat de Franchise: un an d’actualité [The Franchise Contract: a

year of current affairs], 224 PETITES AFFICHES 1, 31–34 (2006) (discussing the agreement and

preference clause and the consequences for violating them).


121. Id.

122. Id. The transferees usually try to obtain clauses where their funds are returned in the

off chance that the franchisor disapproves due to the large risk they are taking, but these

provisions are rare. Id.



D. Brazil

1. Business Formula

The governing franchise law in Brazil became effective in 1995.123

It is

the Dispôe sobre o contrato de franquia empresarial e dá outras

providências, which provides for franchise business contracts and other

franchise provisions.124

This is a disclosure law and “does not contain

provisions affecting the franchise relationship per se.”125

Article Two of the

law defines a franchise as:

A system whereby a [f]ranchisor licenses to the [f]ranchisee the right to use a trademark or patent, along with the right to distribute products or services on an exclusive or semi-exclusive basis and, possibly, also the right to use technology related to the establishment . . . of a business . . . developed or used by the [f]ranchisor, in exchange for direct or indirect compensation . . . .

126

In Brazil, the law does not exempt any business relationship from the

franchise definition.127

Therefore, “partnership relationships, trademark

licenses, wholesale distribution arrangements, and credit card services

arrangements are not necessarily excluded from the scope of. . . [f]ranchise

law.”128

Courts will prevent a franchisor from establishing a franchise branch

in the same territory as a franchisee’s business if the franchise agreement

contains an exclusivity clause.129

The current law in Brazil does not require that the franchisor test the

business formula before offering it for sale to a prospective franchisee.130

However, Brazil may be moving towards requiring this testing of the

business formula. In 2008, Bill No. 4.319/08131

was proposed to require the

franchisor to be in business at least twelve months prior to initiating a

123. Luiz Henrique O. Do Amaral et al., Brazil, in INTERNATIONAL FRANCHISE SALES

LAWS 65, 68 (Andrew P. Loewinger & Michael K. Lindsey eds., 2d ed. 2015).

124. Lei No. 8.955, de 15 de Dezembro de 1994, COL. LEIS REP. FED. BRASIL, 186 (12, t.

2): 4813, Dezembro 1994 (Braz.).

125. Amaral et al., supra note 123, at 68.

126. Id.

127. Id. at 69.

128. Id.

129. Eduardo Grebler & Pedro Silveira Campos Soares, Brazil, in INTERNATIONAL

FRANCHISING BRA/6 (Dennis Campbell ed., 2d ed. 2015) (analyzing the structure of

franchising laws in Brazil).

130. Luciana Bassani, Country Report Brazil: Franchising, INT’L DISTRIBUTION INST. 6

(2013).

131. PL 4319/2008 available at http://www.camara.gov.br/proposicoesWeb/fichadetra

mitacao?idProposicao=416157 [https://perma.cc/BGE2-VJGL].



franchise.132

2. Goodwill133

There is no statute in Brazil “stating that franchisees have an interest in

the franchise’s goodwill.”134

However, Brazilian case law does recognize

that tangible assets in the establishment belong to the franchisee.135

But it is

also unquestioned that the intellectual property belongs to the franchisor,136

so many Brazilian courts have ruled that there are “no grounds for payment

of any compensation to franchisees upon termination [or] non-renewal of

their franchise agreements, as the franchisors were the owners of the most

valuable intangible asset—the trademark—with its definitive power to

attract clientele.”137

However, a recent court decision recognized the

existence of local goodwill that is developed through the franchisee’s

efforts.138

The court applied equity and unjust enrichment principles and

awarded the franchisee half the value of the goodwill.139

However, this is an

isolated decision and is not how the majority of cases are decided.140

Instead,

courts typically evaluate a variety of factors, including, but not limited to,

the following:

(i) the terms of the franchise agreement;

(ii) if the franchisor is the owner of a well-known trademark;

(iii) if the case involves a service franchise or a product franchise

system;

(iv) if the franchise chain was started and developed in Brazil due

to the particular efforts of a franchisee;

132. Id.

133. CÓDIGO CIVIL [C.C.][CIVIL CODE] art. 1142 (Braz.) (defining goodwill).

134. Luciana Bassani & Cândida Caffè, Brazil: Compensation for Goodwill in Franchise

Agreements, 8 INT’L J. OF FRANCHISING L. 13, 13 (2010) (examining whether a franchisee is

entitled to be compensated for goodwill if its agreement terminates or expires under Brazilian

law).

135. Bassani & Caffè, supra note 134 (stating that establishment, or the place of business,

is defined as consisting of “all tangible and intangible assets, duly organized in order to fulfill

the company activities.”).

136. CÓDIGO CIVIL [C.C.] [CIVIL CODE] art. 195 (Braz.), https://www.scribd.com/do

cument/111028729/Brazilian-Industrial-Property-Law-Law-No-9279-96

[https://perma.cc/6W84-45PN] (defining unfair competition).

137. Bassani & Caffè, supra note 134, at 14; see generally, Katherine McGahee, Update:

Franchising in Brazil, 20 LAW & BUS. REV. AM. 95, 95-105(2014) (discussing franchise fees

for use of trademarks, importance of registration of trademarks and other intellectual property,

and Brazil’s membership in the Paris Convention, which, among other things, protects

international marks).

138. Bassani & Caffè, supra note 134, at 14.

139. Id.

140. Id.



(v) if the franchisee has prior experience in the franchise

business; and

(vi) if the franchisee independently attracts clientele due to its

own efforts and not due to the particular elements of the franchise

system, among other aspects.141

Brazilian franchise law mostly details disclosure and registration

requirements for franchises.142

Therefore, the franchise agreement itself is

critical in determining key concepts of the franchise relationship. For

example, it is common for parties to stipulate that the goodwill belongs

solely to the franchisor.143

McDonald’s Latin America’s contract with its

Brazilian master franchisee, Arcos Dourados Comércio de Alimentos, has a

specific provision that any enhancements, improvements, etc. are deemed

the property of McDonald’s as “ʻworks made for hire’ and shall constitute

Intellectual Property hereunder.”144

However, in a situation where the

technology or technical knowledge is unpatented and transferred, the know-

how or technology “will belong to the licensee or franchisee at the expiration

of the[] agreement.”145

The element of exclusivity, such as when the franchise agreement

guarantees exclusivity to a particular franchisee in a certain territory, may

play a role in the court’s decision.146

If the franchisee has exclusive rights to

a territory, it has a strong argument that any increase in the clientele was due

to the franchisee’s sole efforts and thus should be entitled to goodwill.147

However, there are still other elements in the franchise relationship that

a court will consider, such as the oversight exercised by the franchisor. The

more oversight the franchisor exercises, the more unlikely it becomes that a

court will find that the franchisee has goodwill rights, since “any clientele

resulting from this relationship clearly stems from the efforts of the know-

141. Id.

142. Cândida Ribeiro Caffé, Franchising in Brazil, INT’L FRANCHISE ASS’N, at 1 (Mar.

2008), http://www.franchise.org/franchising-in-brazil [https://perma.cc/93TF-BSSE] (sum-

marizing current structure and procedural requirements of franchising law in Brazil).

143. Bassani & Caffé, supra note 134, at 15; see also McDonald’s Latin America’s

Brazilian Master Franchise Agreement, SEC. & EXCH. COMM’N, § 7.4 (Jan. 9, 2009),

http://www.sec.gov/Archives/edgar/data/1508478/000119312511077213/dex103.htm

[https://perma.cc/83RH-UNCW] (“Brazilian Master Franchisee acknowledges and agrees . . .

that the Intellectual Property and all rights therein and the goodwill pertaining thereto in Brazil

belong to McDonald’s . . . and that all uses of the Intellectual property in Brazil shall inure to

and be for the benefit of McDonald’s . . . .”).

144. Id. at § 7.8.

145. Irecê de Azevedo Marques Trench et al., Brazil, in SURVEY OF FOREIGN LAWS AND

REGULATIONS AFFECTING INTERNATIONAL FRANCHISING, Brazil-24 (Philip F. Zeidman ed., 2d

ed. 1990) (outlining current Brazilian franchising law).


147. Id.

http://www.franchise.org/franchising-in-brazil



how and operational methods stipulated by franchisor.”148

To summarize, the provisions of the franchise contract are critical in

determining whether the franchisee will be entitled to goodwill.149

The

degree of control exercised by the franchisor and the degree of exclusivity

of a franchisee in a certain territory, along with other provisions in the

franchise agreement, are critical in determining goodwill compensation.150

E. Canada

1. Business Formula

Presently, six of the ten Canadian provinces have enacted franchise-

specification legislation.151

Alberta enacted Canada’s first franchise law, the

Alberta Franchises Act, in 1972, which was modeled after California

franchise legislation.152

Since Alberta’s enactment, Ontario, New

Brunswick, Prince Edward Island, British Columbia, and Manitoba have also

enacted franchise laws.153

The most recent province to enact a franchise law

was British Columbia, whose franchise legislation became effective in

February 2017.154

In the Province of Ontario, the Arthur Wishart Act (Franchise

Disclosure) (the Ontario Act) defines a franchise as “a right to engage in

business” where a franchisee

“make[s] a payment or continuing payments . . . to the franchisor”; and

“the franchisor grants the franchisee the right to sell . . . or distribute goods or services that are substantially associated with the franchisor’s . . . trade-mark, service mark, trade name, [etc.]” and “the franchisor . . . exercises significant control over, or . . .

148. Id.

149. See supra notes 123-34 and accompanying text.


151. Brad Hanna, Les Chaiet & Jeffrey Levine, Canada, in INTERNATIONAL FRANCHISING

CAN/1(Dennis Campbell ed., 2d ed. 2011).

152. Revised Statutes of Alberta, 2000, Chapter F-23; Franchises Act (the “Alberta Act”).

153. Peter Snell, Larry Weinberg & Dominic Mochrie, Canada, in INTERNATIONAL

FRANCHISE SALES LAWS 90 (Andrew P. Loewinger & Michael K. Lindsey eds., 2d ed. 2015);

Chad Finkelstein, Manitoba Introduces Franchise Law, FINANCIAL POST (Apr. 10, 2012, 1:40

PM), http://business.financialpost.com/2012/04/10/manitoba-introduces-franchise-law/. The

Franchises Act is available at http://web2.gov.mb.ca/laws/statutes/2010/c01310e.php.

154. See Tony Wilson, New B.C. franchise rules offer more protection to franchisees, THE

GLOBE AND MAIL (Oct. 5, 2016, updated May 17, 2018), http://www.theglobeandmail.co

m/report-on-business/small-business/sb-managing/new-bc-franchise-rules-offer-more-

protection-to-franchisees/article32263132/ [https://perma.cc/AYW6-37K2] (explaining that

British Columbia is the sixth Canadian province to regulate the franchise industry in Canada

and analyzing the potential implications of this regulation).



assistance in, the franchisee’s method of operation”; or the “franchisor . . . grants the franchisee the representational or distribution rights, whether or not a trade-mark . . . or other commercial symbol is involved, to sell . . . or distribute goods or services supplied by the franchisor” and “the franchisor . . . provides location assistance” (i.e., securing retail outlets, help with displays, etc.).

155

Similarly, the Franchise Act (the Alberta Act)156

in the province of

Alberta defines franchises as granting a right to the franchisee to engage in

business where the goods and services are substantially associated with a

trademark, with significant control by the franchisor over business

operations.157

However, the Alberta statute requires the payment of a

franchise initial fee, which is not a requirement under the Ontario Act.158

This reason alone renders it possible for a business arrangement, including a

distributorship, to be a franchise in Ontario, but not Alberta.159

The Franchises Act160

in Prince Edward Island—created after the

Ontario Act—is “almost identical” to the Ontario Act in defining a

franchise.161

Finally, the Franchises Act162

in New Brunswick is also

modeled after the Ontario Act and virtually identical to it.163

It simply is not

a requirement in any Canadian law for a franchisor to test a business model

or run a franchise for a minimum amount of time before offering a franchise

for sale.164

Applicable to the legislation in all provinces, Canadian law allows for

the franchisor and franchisee to include an exclusivity provision in the

franchise agreement.165

In the absence of an exclusivity provision, there is

155. Arthur Wishart Act (Franchise Disclosure), S.O. 2000, c. 3, s. 1(1) (Can.) (emphasis

added).

156. Franchises Act, R.S.A. 2000, c F-23, (Can.) https://www.canlii.org/en/ab/laws/stat/r

sa-2000-c-f-23/latest/rsa-2000-c-f-23.html [https://perma.cc/TEV4-LB85].

157. Franchise Act, R.S.A. 2000, c. F-23(1(1)) (Can.).

158. See Snell, Weinberg & Mochrie, supra note 153, at 92 (stating that in Ontario there

is no requirement that a franchise fee be paid).

159. Id.

160. Franchises Act, R.S.P.E.I.1988, c. F-14.1(1) (Can.).

161. See Snell, Weinberg & Mochrie, supra note 153, at 92 (stating that the Prince Edward

Island Act is substantially similar in many ways to the Ontario Act.)

162. Franchises Act, S.N.B. 2007, c. F-23.5 (Can.).

163. See Snell, Weinberg & Mochrie, supra note 153, at 93 (writing that the New

Brunswick Act is alike in both form and structure to the Ontario Act, and the Ontario and

New Brunswick’s definition of a franchise is “virtually identical”).

164. Bruno Floriani & Marvin Liebman, Canada, in GETTING THE DEAL THROUGH:

FRANCHISE 34, 37 (Philip F. Zeidman ed., 2014) http://www.franchise.org/sites/default/fil

es/ek-pdfs/html_page/F2014-Canada_0.pdf [https://perma.cc/VZM3-YSSJ].

165. Frank Zaid & James Blackburn, Country Report Canada: Franchising, INT’L

DISTRIBUTION INST. 14 (2014); Competition Act, R.S.C. 1985, c C-34 http://canlii.ca/t/52f4p



no prohibition on the franchisor from assigning other franchises to

franchisees that will be in direct competition with the existing franchisees.166

2. Goodwill167

Goodwill compensation to a franchisee after termination of the

franchise agreement is not recognized in Canada.168

Typical Canadian

franchising agreements include three main clauses dedicated to ensuring that

the goodwill stays with the franchisor:

“franchisee should acknowledge that the franchisor is the owner of the

trademark . . . the franchisee should be prohibited from registering in its own

name any of the franchisor’s trademarks,”169

“the franchisee acquires no right, title, or interest in and to the

trademarks and all goodwill associated with the trade-marks enures to the

benefit of the franchisor,”170

and

the “franchisee agrees not to . . . dispute [] the ownership or

enforceability of the trade-marks . . . .”171

Clauses suggesting that any goodwill associated with the trademarks

“enures” (inures) to the sole benefit of the franchisor imply that Canada does

not accept the concept of local goodwill or goodwill for the business as a

going concern.

The fact that the franchisor has the right to bring suit in cases of

trademark infringement further enforces the franchisor’s ownership of the

goodwill. In the event of trademark infringement, the franchisee has to

request the franchisor to bring suit.172

Only if the franchisor refuses or

[https://perma.cc/85NC-YQWL]; Exclusivity clauses are generally valid. Jacques

Deslauriers, Vente, louage, contrat d’entreprise ou de service, para 1177 (Wilson et Lafleur,

Montréal 2013).

166. Zaid & Blackburn, supra note 165.

167. Justice Thurlow interpreted the meaning of goodwill in the case of Clairol Int’l Corp.

v. Thomas Supply and Equip. Co. Ltd., 55 C.P.R. 176 (1968).

168. Frank Zaid & James Blackburn, Country Report Canada: Franchising, INT’L

DISTRIBUTION INST. 18 (2014).

169. Daniel Ferguson & Ralph Kroman, Canada, in 1 INTERNATIONAL FRANCHISING

CAN-76 (Dennis Campbell ed., 2001).

170. Darrell Jarvis & Edith Dover, The Canadian Franchise Agreement, in FUNDAME

NTALS OF FRANCHISING - CANADA 182 (Peter Snell & Larry Weinberg eds., 2005).

171. Id.; see also G. Lee Muirhead, Canadianizing Franchise Agreements, 12 FRANCHISE

L.J. 103, 106 (1993) (“Franchisees should acknowledge that they acquire no right, title or

interest in the trademarks and that goodwill associated with the trademarks enures exclusively

to the benefit of the franchisor.”) (emphasis added)).

172. Judy Rost & Bruno Floriani, Trademark and Other Intellectual Property Issues, in

FUNDAMENTALS OF FRANCHISING - CANADA 130 (Peter Snell & Larry Weinberg eds., 2005);

Trade-marks Act, R.S.C., 1985, c. T-13(Section 19) (“Subject to sections 21, 32 and 67, the

registration of a trade-mark in respect of any goods or services, unless shown to be invalid,

http://edoctrine.caij.qc.ca/wilson-et-lafleur-livres/41/1123729084



neglects to do so within two months can the franchisee file a claim for

trademark infringement as if it were the owner.173

Franchisors can easily

avoid this situation by including a statement that the franchisor has “sole

discretion to take any action it deems appropriate” in the franchise

agreement.174

However, franchisors need to act cautiously as courts have awarded

goodwill compensation to franchisees in recent cases. Termination of the

franchise agreement signifies a loss of operating income for the franchisee.175

Thus, on a theory of unjust enrichment, “meaning compensation for loss of

the goodwill generated by the franchisee,” franchisees have been able to

recover for local goodwill.176

Still, as long as “the franchisor had legal

justification to terminate the franchise agreement, the franchisee will have

no right to such compensation.”177

The franchisor’s exclusive ownership of the goodwill associated with

the franchise’s trademark brings about harsh consequences. Recently, the

Quebec Superior Court held that Dunkin’ Donuts, by failing to support the

brand against competition, materially breached the franchise agreement.178

The court awarded plaintiff-franchisees the sales they would have realized

gives to the owner of the trade-mark the exclusive right to the use throughout Canada of the

trade-mark in respect of those goods or services.”).

173. Rost & Floriani, supra note 172, at 130; Peter V. Snell, Key Points in Advising

Franchisors, 3.1.7 (2010).

When drafting trademark licensing provisions in the franchise agreement, the

drafter should be aware of the rule set out in s. 50(3) of the Trade-marks Act. In

the absence of an agreement to the contrary between the franchisor and the

franchisee, the franchisee may force the franchisor to take proceedings for

infringement of the licensed trademarks and, if the franchisor refuses or neglects

to do so within two months after being so requested, the franchisee may institute

proceedings for infringement in the franchisee’s own name as if the franchisee

were the owner, making the franchisor a defendant. In view of that provision, it

is common in the franchise agreements to include a waiver by the franchisee of

these rights.

Id.

174. Rost & Floriani, supra note 172, at 130.

175. Paul J. Bates, et al., Canadian Franchise Disputes, BATES BARRISTERS PROF. CORP.

9 (Dec. 2008), http://www.batesbarristers.com/FranchiseLawDisputes.pdf [https://perma.cc

/MWY9-6K5D].

176. Id.

177. Id.

178. Jennifer Dolman et al., Does a Franchisor Have an Obligation to Maintain Brand

Strength?, LEXOLOGY (June 28, 2012), http://www.lexology.com/library/detail.aspx?g=2c

a218c3-2e35-40e3-8c52-de0b74fa1e88 [https://perma.cc/E6XM-WGJG] (summarizing the

Quebec Superior Court’s decision in Bertico Inc. v. Dunkin’ Brands Canada Ltd., [2012] C.S.

6439 (Can. Que.)); Christie Hall, Dunkin’ Donuts an Implied Duty on Franchisors to Enhance

the Brand, CANADIAN FRANCHISE (Sept. 4, 2015) http://www.canadianfranchisemagazine

.com/expert-advice/dunkin-donuts-implied-duty-franchisors-enhance-brand/

[https://perma.cc/C866-MBAN].



had Dunkin’ Donuts maintained its brand leadership in the market, plus

compensation for the loss of the franchisees’ investment.179

In other words,

failing to maintain the brand’s high goodwill in the marketplace can result in

a fundamental breach of contract, despite the franchisees’ continuous use of

the brand and their business being a going concern.180

F. Australia

1. Business Formula

The Trade Practices (Industry Codes-Franchising) Regulations 1998

governs the Australian franchise agreement for obligations entered into

before 2015.181

The Competition and Consumer (Industry Codes–

Franchising) Regulation 2014, known as the Franchising Code of Conduct

(the Code), applies to all contracts agreed upon from January 1, 2015

onward.182

The franchise agreement can be completely or partially written,

oral or implied; all are acceptable forms of agreement under the Code.183

In

Australia, a franchise is a relationship where the agreement between the two

parties grants to one party the right to offer, supply, or distribute goods or

services under a system or marketing plan.184

Other requirements of the

franchising relationship include: the marketing plan is “substantially

determined, controlled or suggested by the franchisor or an associate of the

franchisor;”185

the business must “be substantially or materially associated

179. Dolman et al., supra note 178.

180. Id.; Emerson, supra note 91, at 590-92 (discussing Bertico, supra notes 178-79 and

accompanying text and, in contrast, an Ontario case, Fairview Donut Inc. v. TDL Grp. Corp.,

2012 CanLII 1252 (Can. Ont. Super. Ct.), and evaluating the need for franchisor know-how’s

steady transmission to the franchisees as part of their ongoing contractual relationship). A

major reason for a franchise system’s know-how – savoir faire – is the franchise parties’

development and maintenance of goodwill.

181. Stephen Giles & Penny Ward, Australia, in INTERNATIONAL FRANCHISE SALES LAWS

1, 4 (Andrew P. Loewinger & Michael K. Lindsey eds., 2d ed. 2015).

182. Id.; AUSTRALIAN COMPETITION & CONSUMER COMMISSION, THE FRANCHISOR

COMPLIANCE MANUAL 1 (Dec. 2014) (“The Franchising Code of Conduct is a mandatory

industry code that applies to all of the parties to a franchise agreement.”).

183. Giles & Ward, supra note 181, at 4. This law is also in the pre-2015 law. Trade

Practices (Industry Codes – Franchising) Regulations 1998 (Cth) § 4(1)(a) (Austl.).


Practices (Industry Codes – Franchising) Regulations 1998 (Cth) § 4(1)(b) (Austl.);

Competition and Consumer (Industry Codes — Franchising) Regulation 2014 (Cth) Select

Legislative Instrument No. 168, 2014 (Austl.), https://www.legislation.gov.au/Det

ails/F2014L01472 [https://perma.cc/K7CF-XDCF] (defining “franchise agreement” in Part 1,

Division 2).


Practices (Industry Codes – Franchising) Regulations 1998 (Cth) § 4(1)(b) (Austl.).



with a trade mark, advertising or a commercial symbol . . . owned . . . by the

franchisor;”186

and “the franchisee must pay or agree to pay . . . an amount”

that may include “an initial capital investment fee,” a royalty fee, “a training

fee,” or other agreed upon fees.187

There is no franchisor or disclosure document registration

requirement,188

although a disclosure document is required as part of the

franchise relationship under Section 6 of the Code.189

Australia’s definition of a franchise agreement is very broad. It covers

not only franchise arrangements, but also some forms of licensing and

distribution arrangements, “particularly those that involve a system or

marketing plan, as well as a right to use a trademark.”190

However, the

following are not classified as franchise-type business relationships: (a) an

employer-employee relationship; (b) a partnership; (c) a landlord-tenant

relationship; (d) mortgagor-mortgagee relationship; (e) lender-borrower; and

(f) relationships between the members of a cooperative that is formed by a

commonwealth or state law.191

Any attempt to shape a franchise relationship into any of the listed

relationships draws attention from the Commonwealth. The Code does not

exempt other types of credit arrangements or wholesale distribution


Practices (Industry Codes – Franchising) Regulations 1998 (Cth) § 4(1)(c) (Austl.).

187. Trade Practices (Industry Codes – Franchising) Regulations 1998 (Cth) §

4(1)(d)(i)–(iv) (Austl.).

188. Giles & Ward, supra note 181, at 5, 22.

189. Trade Practices (Industry Codes – Franchising) Regulations 1998 (Cth) § 6 (Austl.);

AUSTRALIAN COMPETITION & CONSUMER COMM’N, THE FRANCHISOR COMPLIANCE MANUAL:

PRE-ENTRY DISCLOSURE AND COOLING OFF, http://www.accc.gov.au/publications/franchisor-

compliance-manual/the-franchisor-compliance-manual/pre-entry-disclosure-and-cooling-off

[https://perma.cc/73NN-NGZQ] (last visited Feb. 28, 2017).

Under the Code, you must provide an information statement to a party who

proposes to enter into a franchise agreement. You are also required to provide a

disclosure document, franchise agreement and a copy of the Code to a party at

least 14 days before they: enter into a franchise agreement (or an agreement to

enter into a franchise agreement); pay any non-refundable money or other

valuable consideration to you or an associate in connection with the franchise

agreement; renew or extend their agreement.

Id.

190. Giles & Ward, supra note 181, at 6. See Lou Jones, Edward Levitt & Albrecht

Schulz, Inadvertent Franchise 11 (26th Annual IBA/IFA Joint Conference - “Managing Risks

in International Franchising”) (May 18-19, 2010) (stating that, under the pre-2015 Australian

franchise law, the Trade Practices (Industry Codes-Franchising) Regulations, “[t]he definition

of ‘franchise agreement’ under the Code is broad and covers most arrangements involving the

licensing of a name and operation of a business system.”).

191. Giles & Ward, supra note 181, at 6. That is also the law under the pre-2015

Australian law. Trade Practices (Industry Codes – Franchising) Regulations 1998 (Cth) §

4(3) (Austl.).

http://www.accc.gov.au/publications/franchisor-compliance-manual/the-franchisor-compliance-manual/pre-entry-disclosure-and-cooling-off

http://www.accc.gov.au/publications/franchisor-compliance-manual/the-franchisor-compliance-manual/pre-entry-disclosure-and-cooling-off



arrangements.192

However, a wholesale distribution agreement will not fall

under the franchise definition if the only payment required is for goods or

services at their usual wholesale price,193

as this would be a simple buyer-

seller arrangement.

The Code is rendered inapplicable where the franchise agreement is (1)

for goods or services substantially similar to those supplied by the franchisee

“at least two years immediately before entering into the franchise agreement”

and (2) the sales of those goods/services “are likely to provide” 20% or less

of the franchisor’s gross turnover for that class of goods in the first year.194

Australia does not require testing of the franchise business model before an

offer of sale is made to a perspective franchisee.195

In Australia, additional restrictions on franchise agreements relate to the

availability of exclusivity provisions. Exclusivity provisions are subject to

antitrust laws; initially, subject to the Trade Practices Act (TPA) of 1974,

and currently subject to the Competition and Consumer Act (CCA) of

2010.196

Under the CCA, a franchisor is prohibited from exclusive dealing.

Exclusive dealing is found where the franchisor limits the franchisee to a

territory and affects the franchisee’s right to compete in the marketplace.197

In determining whether exclusive dealing is occurring, the critical factor to

evaluate is the length of the restriction; the longer, the more likely the

restriction will become invalid.198

192. Giles & Ward, supra note 181, at 6. Again, that is also the law under the pre-2015

Australian law. Trade Practices (Industry Codes – Franchising) Regulations 1998 (Cth)

(Austl.).

193. Giles & Ward, supra note 181, at 6.

194. Id.

195. Philip Colman & John Sier, Australia, in GETTING THE DEAL THROUGH: FRANCHISE

5, 7 (Philip F. Zeidman ed., 2014), available at http://www.franchise.org/si

tes/default/files/ek-pdfs/html_page/F2014-Australia_0.pdf [https://perma.cc/K889-58SH].

This source suggested that as a practical matter, a prospective franchisor might not be very

successful or attract any franchisees to engage in business relations unless they have some

experience in franchising. Id.

196. AUSTRALIAN COMPETITION & CONSUMER COMM’N, EXCLUSIVE DEALING,

https://www.accc.gov.au/business/anti-competitive-behaviour/exclusive-dealing

[https://perma.cc/V9VD-PJ8H] (last visited Feb. 26, 2017).

Broadly speaking, exclusive dealing occurs when one person trading with another imposes

some restrictions on the other’s freedom to choose with whom, in what, or where they deal.

Most types of exclusive dealing are against the law only when they substantially lessen

competition, although some types are prohibited outright.”). Competition and Consumer Act

2010 (Cth) s 47 (Austl.), available at http://www.austlii.edu.au/au/legis/cth/consol_act/caca

2010265/s47.html [https://perma.cc/28ZR-BUYT].

197. Carolyn Addie et al., Australia, in 1 INTERNATIONAL FRANCHISING Aus-54 (Dennis

Campbell ed., 2001).

198. Id.

https://www.accc.gov.au/business/anti-competitive-behaviour/exclusive-dealing



2. Goodwill

In Federal Commissioner of Taxation v Murry, the Federal Court of

Australia defined goodwill as “the legal right or privilege to conduct a

business in substantially the same manner and by substantially the same

means that have attracted custom[ers] to it. It is a right or privilege that is

inseparable from the conduct of the business.”199

Because goodwill is a

derivative product of a recognized trademark, a particular location, or the

reputation of the business, the federal court refused to define goodwill in

terms of its elements, preferring instead to describe sources that contribute

to goodwill.200

These sources can be manufacturing or distribution

techniques, efficient use of assets, good relationships with employees, lower

prices that attract customers, etc.201

The court carefully distinguished the sources of goodwill from goodwill

itself.202

“Goodwill is an item of property and an asset in its own right. [I]t

must be separated from those assets . . . that can be individually identified

and quantified in the accounts of a business.”203

The court concluded that

selling assets does not include the sale of goodwill unless the sale includes

the right to conduct the business204

in substantially the same manner and by

substantially the same means “as has attracted custom[ers] to the business in

the past.”205

There are occasions when the sources of goodwill belong to a third

party; for example, when the source is the premise from which a business

199. Commissioner of Taxation (Cth) v Murry [1998] HCA 42, ¶ 23 (Austl.) available at

http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/HCA/1998/42.html?query=

[https://perma.cc/5684-YD4E]; Ian Tregoning, FCT v Murry: The Federal Court Takes

Licence with Goodwill, 14 DEAKIN L. REV. 201 (1996), available at http://www.austlii.ed

u.au/au/journals/DeakinLawRw/1996/14.pdf [https://perma.cc/2WYE-7LVT].

200. Fed. Comm’r of Taxation v Murry (1997) 193 CLR 605, ¶ 24 (Austl.)

201. Id. ¶ 25. The Court does go on to describe other sources of goodwill, such as

convenience of location or where a business chooses to spend its assets. Id. ¶¶ 26–28.

202. Id. ¶ 30.

203. Id.; see also Robert W. Emerson, Franchises as Moral Rights, 14 WAKE FOREST J.

BUS. & INTELL. PROP. L. 540, 553 (citing MAREE SAINSBURY, MORAL RIGHTS AND THEIR

APPLICATION IN AUSTRALIA 76 (2003) (noting that Australian law protects against “passing

off,” a type of misattribution tort claim where business goodwill, viewed as property, is

injured by being passed off as the property of another)).

204. Fed. Comm’r of Taxation v Murry (1997) 193 CLR 605, ¶ 31 (Austl.).

205. Id. ¶ 45; see also Kristin Stammer & Irene Zeitler, How Should Franchisors Deal

with Goodwill?, HERBERT SMITH FREEHILLS 1, 1 (Mar. 2, 2012), http://www.herberts

mithfreehills.com/-/media/Freehills/A02031218%2019.pdf. [https://perma.cc/6NKU-MKB8

] (stating that, “[s]ince Murry, the proposition has been that goodwill is transferred only if

there is a transfer of the legal right or privilege to conduct a business: in substantially the same

manner, and by substantially the same means, as has attracted custom to the business in the

past”).

http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/HCA/1998/42.html?query

http://www.austlii.edu.au/au/journals/DeakinLawRw/1996/14.pdf

http://www.austlii.edu.au/au/journals/DeakinLawRw/1996/14.pdf



operates (such as when the premises are leased) or a brand/trademark.206

Courts have found it difficult to classify goodwill in situations where sources

of goodwill return to the franchisor after termination of the franchise

agreement and the licensee’s business becomes either nonexistent or can no

longer continue in the same way.207

The court will look at how the business

is run to decide what course of action to take concerning goodwill.208

For example, in BB Australia v Karioi, the court determined that the

goodwill remained with the franchisee.209

Blockbuster granted Karioi, the

franchisee, the right to use Blockbuster’s methods of operations used in its

existing video store.210

Before it became a franchisee, Karioi had traded as

a video rental store in the same locations and had substantial goodwill.211

Because these “relevant sources of goodwill remained with the

franchisee . . . the goodwill in the business at the end of the franchise

arrangement” remained with them also.212

However, in Australia, a typical franchise agreement contains clauses

stating that any “goodwill arising from use of the franchise system . . .

belongs to the franchisor,” that once the agreement is terminated the

franchisee must return all franchisor-owned materials (such as brands,

manuals, etc.), and that the franchisee cannot establish itself as a competitor

to the franchise business upon termination of the franchise agreement.213

The

court will still look to the franchising relationship to determine ownership of

goodwill, which means that franchisors should draft their contracts as

explicitly as possible.214

Certain situations that call for careful attention are

when:

a. [T]he franchise system is not one which seeks to dictate all elements of the way a franchisee operates, b. there are no obligations, or no obligations enforced by the franchisor requiring the franchisee to follow all aspects of a franchise system, and c. the franchisee operated an existing similar business, or holds the

206. Stammer & Zeitler, supra note 205.

207. Id. at 2.

208. Id.

209. Id.

210. BB Australia Pty Ltd v Karioi Pty Ltd [2010] NSWCA 347 ¶ 2 (Austl.).

211. Id. ¶ 34.

212. Stammer & Zeitler, supra note 205, at 2.

213. Id. at 3. A franchise contract written in favor of the franchisor could be held to be

unconscionable, especially if the franchisor has superior bargaining power, as is most often

the case. See Emerson, supra note 76, at 479 (“Australian courts have broad latitude in

assessing all aspects of a contract or transaction to ensure fairness and prohibit unconscionable

conduct on the part of the stronger party, which, at least in the franchise context, is most often

the franchisor.”).

214. Stammer & Zeitler, supra note 205, at 3.



lease, or other sources of goodwill used within its business.215

G. Germany

1. Business Formula

During the past decade and a half, franchising has been rapidly growing

in the Federal Republic of Germany, but Germany has no specific legislation

in place to govern the franchise relationship.216

Thus, franchise agreements

are governed by the contractual requirements in the German Civil Code and

Commercial Code.217

One of the earliest definitions of the franchise contract

was introduced by the German Franchise Association and provides that

“[t]he performance program of the franchisor. . . consists of a concept for

purchase, distribution and organization, utilization of industrial property

rights, the training of the franchisee and the obligation of the franchisor to

support the franchisee actively and consistently and further to develop the

concept.”218

Germany does not have a mandatory legal requirement to test the

215. Id.

216. Marco Hero, Country Report Germany: Franchising, INT’L DISTRIBUTION INST. 1

(2015); see also Robert W. Emerson, Franchising Constructive Termination: Quirk,

Quagmire, or a French Solution?, 18 U. PA. J. BUS. L. 163, 175 n.63 (2015) (noting that

Germany has the third highest number of franchise networks in Europe at 910); Daniel Lindel,

Franchising: The Increasing Importance of Franchising in Germany, GERMANY TRADE AND

INVEST, http://www.gtai.de/GTAI/Navigation/EN/Invest/Industries/Consumer-industries/fr

anchising.html [https://perma.cc/4L7G-QLTJ] (last visited Mar. 3, 2017).

[The German franchising sector] has been growing more rapidly than the overall

economy for years, and in 2015, it recorded gains of more than 4 percent. . . .

• The turnover generated by the German franchising industry grew by 4.3% in

2015 to reach a total of EUR 99.2 billion.

• In 2015, almost 1,000 franchisors operated in Germany.

• Approximately 118,000 independent franchisees employed more than 686,000

people in 2015: an increase of more than 25% as compared to 2012.

• In 2015, 39% of franchise systems in Germany were in the service sector,

followed by retail with a share of 31%, food service and tourism with 20%, and

skilled trades with 8%.

Id.

217. Hero, supra note 216, at 1-2. In Germany, there are no specific laws regulating

franchising. Therefore, the legal framework for the offer and sale of franchises is governed

only by the general provisions of contract law (German Civil Code) (Bürgerliches

Gesetzbuch) (BGB), consumer law, commercial law (the Commercial Code), competition

law, and unfair trade law. Karsten Metzlaff, Franchising in Germany: Overview, PRAC. LAW

(last updated Sept. 1, 2016), http://uk.practicallaw.com/4-633-5269#a959851 [https://perm

a.cc/WR75-A6Y3].

218. Stefan Bretthauer, Germany, in INTERNATIONAL FRANCHISING GER/4 (Dennis

Campbell ed., 2d ed. 2017).



franchising formula before offering it for sale.219

However, the German

Franchise Association does list “principles” in its Code of Ethics that must

be applied in order to become and remain a member.220

These principles

include (1) running a successful business concept for a reasonable time

period and with at least one pilot project before someone tries selling that

model as a franchise; (2) owning or legitimately using the company name,

trademark or other special labeling; and (3) conducting initial training of the

franchisee as well as assuring ongoing commercial/technical support.221

In Germany, statutes favor the franchisee, as is suggested by its usage

of agency law principles. “The franchisee is pursuing the aim of running a

system business and earning revenues.”222

The law sees the franchisor’s role

as supportive of this goal.223

Therefore, protecting the franchisee from

competition becomes part of the franchisor’s legal obligations under the

agreement.224

However, the obligation only arises if the franchisee’s

financial existence is jeopardized in the long term due to other franchisees

competing in the territory.225

German contracts often contain similar protections of the franchisee

that are seen in other countries.226

The franchisor cannot grant licenses to

other franchisees in the territory,227

the franchisor itself cannot compete

219. Karsten Metzlaff & Tom Billig, Germany, in GETTING THE DEAL THROUGH:

FRANCHISE 69, 70 (Philip F. Zeidman ed., 2014).

220. Id.

221. Id.

222. Hero, supra note 216, at 9.

223. Id.; see also Emerson, supra note 91, at 619 n.183 (noting the obligation of

franchisors to grant know-how to franchisees).


225. Id.

226. Marco Hero, Germany, in FUNDAMENTALS OF FRANCHISING: EUROPE 183, 193-196

(Robert A. Laurer & John Pratt eds. 2017) (discussing how any number of laws found in

Germany lead to the crafting of franchise agreements with protections for the franchisee –

compliance with consumer protection laws, recognition of the statutory restrictions on non-

compete covenants and on disclaimers about fraud, clauses on social security, data protection,

and antitrust matters, and commonly granted franchisee exclusive territories); see Emerson,

supra note 91, at 614 n.148 (noting German contract law generally governs franchising, and

German franchise contracts must be written in accordance with specific rules).

227. See Karl Rauser & Karsten Metzlaff, Can Sub-franchise Continue once Master

Franchise Agreement is Revoked?, INTERNATIONAL LAW OFFICE (Jan. 15, 2013).

It was irrelevant that the case involved an exclusive sub-licence for Germany and

Austria. While this naturally restricts the right of the main licensee considerably

because it cannot grant any other licence for that territory, the main licensor must

accept this restriction because it consented to the main licensee granting

exclusive sub-licences. Therefore, the main licensor must accept that its

exclusive right of use is restricted by the exclusive rights of use granted to the

sub-licensee.

Id.



directly in the territory,228

and the franchisor must prohibit all franchisees

from selling directly in the territory.229

However, the franchisor can reserve

its right to compete in the territory on a particular brand or product line.230

Care should be taken to define exclusivity clearly in the agreement, as courts

will imply exclusivity rights into franchise agreements under the rationale

that the franchisee’s business success is an aim of both parties under the

agreement.231

2. Goodwill

Under agency principles in the commercial code,232

Germany

recognizes compensation for goodwill upon termination of the franchise

contract.233

To obtain compensation under the German code, the agent

(franchisee) has to prove that: (1) the principal (franchisor) enjoys substantial

benefit from clientele (in other words the goodwill) that the franchisee has

accumulated even after termination of the contract; (2) the franchisee lost his

right to commission on future sales or those recently transacted because of

the termination of the contract; and (3) the payment is equitable under the

circumstances.234

Under these laws, some franchisors in Germany “have had

to pay up to one year’s revenue in goodwill compensation upon termination

to certain franchisees.”235

If goodwill indemnity is provided, the

228. Thomas Salomon & Michael Dettmeier, Franchising Country Questions: Germany,

PRAC. LAW (last updated July 5, 2013), http://us.practicallaw.com/6-102-2116 [https://perm

a.cc/GGE2-SNHD] (noting that the German Act Against Restrictions on Competition covers

contractual territories – in effect, to franchises – and that territorial restrictions thus are

allowed when they do not affect trade between European Union (EU) member states; further

citing Article 4 of the EU Block Exemption Regulation on Vertical Restraints and therefore

further stating, “[A]n agreement that the franchisee must not sell in territories where he would

be a competitor of the franchisor or other franchisees will only be permissible if the franchisee

remains free to passively sell into such territories.”).


230. Id.

231. Id.

232. HANDELSGESETZBUCH [HGB] [Commercial Code], May 10, 1897, BAUMBACH-

DUDEN 252 (Ger.), translated in THE GERMAN COMMERCIAL CODE 31–32 (Simon L. Goren

trans., 2d ed., 1998).

233. Rolf Trittmann, Germany, in 1 INTERNATIONAL AGENCY AND DISTRIBUTION LAW

Ger-16 (2d ed., Dennis Campbell ed., 2017).

234. THE GERMAN COMMERCIAL CODE 31–32 (Simon L. Goren trans., 2d ed., 1998). See

also Trittmann, supra note 233, at Ger-35, 36 (explaining that the first element, whether the

franchisor can obtain sufficient benefit from the goodwill (clientele) that the franchisee

created, is determined by presuming that the clientele will continue to conduct business with

the franchisor after termination of the contract, even if they do not).

235. Chris Wormald, Germany: Agency Compensation Denied, FIELDFISHER (Jan. 27,

2012), http://www.fieldfisher.com/publications/2012/01/franflash-compensation-upon-termi

nation#sthash.Byc5LQBN.dpbs [https://perma.cc/4F5S-8KSR].



distributor/franchisee also should receive it upon termination the same as for

an agent; while the calculations vary from court to court, the amounts are

calculated “based on the distributor’s margin made in the last year with new

customers brought by the distributor or with existing customers where the

distributor has significantly increased the business.”236

However, this trend of awarding goodwill compensation to franchisees

may change soon. In a recent decision, a regional court in

Mönchengladbach237

rejected a franchisee’s claim for goodwill.238

The case

involved a bakery franchisee that sued for goodwill compensation when the

franchisor terminated the franchising contract.239

The court was explicit in

stating that there is no compensation for goodwill unless the contract

specifically calls for the transfer of the customer base.240

The ramifications

of this remain to be seen, but “[f]or the time being, franchisors should not

include a contractual obligation to transfer the customer base in the franchise

agreement for Germany.”241

A franchisee may also be able to recover under Section 89b of the

Commercial Code (compensation claim of a commercial agent after ending

of the contract).242

This compensation is only awarded if two conditions are

met: (1) the franchisee has been integrated in the sales organization of the

franchisor in a manner similar to that of a commercial agent; and (2) there

exists a contractual obligation to transfer the customer base.243

For the first

factor, the existence of non-compete or exclusivity provisions is a strong

indicator of the franchisee’s integration into the system.244

As most franchise

236. Benedikt Rohrssen, “German” Distributor Indemnity – How to avoid it,

LEGALMONDO (Nov. 21, 2016), https://www.legalmondo.com/2016/11/german-distributor-

indemnity-avoid/ [https://perma.cc/X8P3-QRL8].

237. Mönchengladbach, Germany is located west of the Rhine, between Düsseldorf and

the Dutch border.

238. Wormald, supra note 235.

239. Id.

240. Id.

241. Id.

242. See Karsten Metzlaff & Karl Rauser, De facto retention of customer base establishes

no Section 89b claim, INTERNATIONAL LAW OFFICE (May 31, 2011); see also Karsten Metzlaff

& Karl Rauser, Compensation of Franchisee upon Termination of the Franchise Agreement,

INTERNATIONAL LAW OFFICE (July 6, 2004) (“Section 89b of the German Commercial Code

entitles a commercial agent to compensation upon termination of the contract, since

throughout the duration of the contract, the agent builds up an established clientele which the

principal can continue to use.”).

243. Metzlaff & Rauser, De facto retention of customer base establishes no Section 89b

claim, supra note 242; Bernd Westphal & Peter Zickenheiner, The Goodwill Indemnity in

Agency Contracts and in Distribution Contracts in Germany: When Has to be Paid and How

Has to be Calculated, http://images.to.camcom.it/f/ EICConvegni /28/28783_CCIAAT

O_2992015.pdf.

244. Karsten Metzlaff, Germany – Franchisee’s Claim for Compensation upon



agreements contain one – if not both – of these clauses, typically there is no

dispute that the franchisee is integrated in the franchise system.245

The most

significant barrier to this Section’s application is that most franchise

agreements do not provide a customer retention clause in their contract. For

the franchisor, this legislative requirement usually bars franchisee recovery

for de facto retention that occurs at the end of the franchise relationship,

however, that is not always the case. A few franchisees have successfully

established entitlement to compensation under this section notwithstanding

the absence of such a clause when the franchisor was provided the names

and addresses of the franchisee’s clientele at the termination of the

relationship.246

H. India

1. Business Formula

India does not currently have franchise-specific legislation enacted.247

Thus, India’s Contract Act of 1872 governs franchise agreements. Chapter

5 of the Finance Act of 1999 does provide that a “franchise” is “an agreement

by which the franchisee is granted representational rights to sell or

manufacture goods or to provide service or undertake any process identified

with franchisor, whether or not a trade mark, service mark, trade name or

logo . . . is involved.”248

With no franchise-specific laws, India does not have

a testing requirement where the franchisor must test the business formula

before offering it for sale to the franchisee.249

The parties to a franchise agreement are not precluded from contracting

Termination, 5 INT’L J. FRANCHISING LAW 8 (2007).

245. Id.

246. Metzlaff & Rauser, Compensation of Franchisee upon Termination of the Franchise

Agreement, supra note 242 (“The decisive aspect for the court was whether the franchisor

could make immediate use of the established clientele without further ado once the contract

had terminated.”).

247. Srijoy Das, Franchising in India, INT’L FRANCHISE LAWYERS ASS’N (Oct. 29, 2017)

(“There is no specific legislation regulating franchise arrangements in India.”); Saurabh

Misra, Country Report India: Franchising, INT’L DISTRIBUTION INST. 6 (last updated Jan.

2015); Philip F. Zeidman & Abhishek Dube, How India’s Investment Laws Affect

Franchisors, FRANCHISE TIMES (Apr. 27, 2017),

http://www.franchisetimes.com/May-2015/How-Indias-investment-laws-affect-franchisors/

[https://perma.cc/89L6-BSJS].

248. Misra, supra note 247, at 1.

249. Id.; Preeti G. Mehta, Franchising in India: Overview, PRACTICAL LAW COUNTRY

Q&A 5-630-8133 (2016) (Law as of July 1, 2016), Westlaw, http://us.practicallaw.com/5-

630-8133 (“There is currently no legislation specifically regulating franchising or granting

protection to local agents in India. In the absence of specific legislation, the offer and sale of

franchises in India is governed by a variety of statutes, rules and regulations . . . .”).

http://us.practicallaw.com/5-630-8133

http://us.practicallaw.com/5-630-8133



for exclusivity provisions by Indian law.250

The burden of proof is on the

franchisee to prove beyond a reasonable doubt that it had exclusivity

rights.251

Without such a clause, the franchisor is free to directly compete

with the franchisee in any territory.252

Although case law is sparse as to how

courts treat a franchisor’s violation of an exclusivity clause, Indian courts

may rule in favor of the franchisee on good faith or breach of contract

grounds.253

2. Goodwill

India does not statutorily recognize goodwill compensation to the

franchisee, but courts are willing to award goodwill compensation when it is

reasonable.254

This equitable application of law can be seen in a related topic:

know-how licensing. In In re Sarabhai M. Chemicals Pvt. Ltd. v. Unknown,

the Monopolies and Restrictive Trade Practices Commission (the MRTPC)

held against a know-how clause between a German and Indian

pharmaceutical franchise that did not allow the Indian franchisee to sell,

package, or manufacture any of the licensed products for twenty years.255

The commission found that because medicine was acutely scarce and so vital

to national health, this clause was against the national interest of India.256

The franchisee received the actual ownership of the merchandise it was

licensed to sell.257

Any goodwill the franchisee obtains would presumably have to be

bought by the franchisor in the event the franchisor wants to terminate the

franchise contract, since the franchisee essentially owns it. It is unclear if

this is the law in India generally or only in areas where the country has a

strong public interest.

250. Misra, supra note 247, at 6 (§ 8).

251. Id.

252. Id.

253. Id.

254. Id. at 10 (§ 14).

255. In Re: Sarabhai M. Chems. Pvt. Ltd. v. Unknown, 1979 49 CompCas 145 NULL

(1978) https://indiankanoon.org/doc/199164/ [https://perma.cc/9NX5-NECQ].

256. Id.

It is and has been such that there has been acute scarcity of some of these

pharmaceuticals and chemicals, so vital for the health of our nation. In imposing

a negative covenant of this kind on the second respondent it is obvious that the

first respondent was actuated by purely private interest, an interest which

completely conflicted with and was detrimental to the national interest.

Id.

257. Id.

https://indiankanoon.org/doc/199164/



I. Japan

1. Business Formula

Japan does not have one uniform definition of what constitutes a

franchise.258

Instead, there are three relevant definitions. The Medium-

Small Retail Promotion Act (MSRPA) defines a “qualified chain-store

business” as “a business in which, according to a standard contract, goods

are continually sold, directly or by a designated third party, and assistance

over the operation is continually given, principally to medium or small sized

retailers.”259

The Act also defines a “specified chain business,” which

encompasses a business’s use of trademarks, trade names, etc.260

The

Antimonopoly Act (the Act on Prohibition of Private Monopolisation and

Maintenance of Fair Trade – Act No. 54 of 1947) notes that franchises can

be defined by multiple definitions, but states that generally a franchise is “a

form of business in which the head office provides the member with the

rights to use a specific trademark and trade name, and provides coordinated

control, guidance, and support for the member’s business and its

management.”261

The Japan Fair Trade Commission regulates the

258. Kenichi Sadaka & Aoi Inoue, Japan, in THE INTERNATIONAL COMPARATIVE LEGAL

GUIDE TO: FRANCHISE 2016 87, 87 (2d ed. 2016), https://www.amt-law.com/res/ne

ws_2015_pdf/151210_4659.pdf [https://perma.cc/V4JG-5BCS] (sharing insight on Japanese

franchise law by lawyers from the Japan-based law firm of Anderson Mori & Tomotsune).

259. Souichirou Kozuka & Jun Kanda, Country Report Japan: Franchising, INT’L

DISTRIBUTION INST. Q.1 (last updated June 2011).

The Medium and Small Retail Commerce Promotion Act (Law No. 110 of 1973)

(MSRCPA) regulates franchising that falls under the definition of “specified

chain business.” A “chain business” is defined as a business that, under an

agreement with standard terms and conditions, continuously sells or acts as an

agent for sales of products and provides guidance regarding management,

primarily targeting medium and small retailers (Article 3, paragraph 5,

MSRCPA). A “specified chain business” is defined as any chain business where

a member (Article 11, paragraph 1, MSRCPA):

• Is allowed to use certain trademarks, trade names or any other signs.

• Must pay joining fees, deposits or any other monies on becoming a member.

Apart from the MSRCPA and the Guidelines concerning the Franchise System

under the Anti-Monopoly Act, there is no law that specifically regulates

franchising. There are, however, many laws that regulate specific industries or

businesses, which may also apply to franchises. The franchisor must therefore

comply with the applicable laws and regulations.

Etsuko Hara, Franchising in Japan: Overview, PRACTICAL LAW COUNTRY Q&A 4-632-3469

(2017) (Law as of June 30, 2017), Westlaw, http://us.practicallaw.com/4-632-3469

[https://perma.cc/K7XJ-LVQW].

260. Hara, supra note 259.

261. JAPAN FAIR TRADE COMM’N, GUIDELINES CONCERNING THE FRANCHISE SYSTEM



enforcement of the Antimonopoly Act and issued guidelines on franchising

in 2002.262

The Japan Franchise Association (JFA) defines a franchise as:

[A] continuing relationship between one business concern (called a Franchisor) and another business concern (called a Franchisee) where a Franchis[o]r and a Franchisee enter into a contractual agreement, the Franchis[o]r granting the Franchisee the right to use the signs representing the Franchisor’s business . . . the Franchisee paying the consideration to the Franchisor in return . . . .

263

Courts most frequently cite JFA’s definition, which is narrower than the

MSRCPA definition. Furthermore, franchisors have no obligation to test

their business formula before offering it to a franchisee in Japan.264

In 2000, the Kagoshima District Court ruled that exclusivity was

inherent in the term “territory.”265

This case involved a master franchise

agreement that did not explicitly include an exclusivity provision.266

The

court determined that the franchisee is entitled to exclusivity in Japan and

the contract does not need to provide for that in order for exclusivity to

apply.267

The franchisor’s main obligation in Japanese exclusivity clauses is

to refrain from conducting business in the franchisee’s territory.268

2. Goodwill

On the topic of goodwill, it is not so clear-cut. One case applying

distributorship law awarded goodwill compensation (in an amount equal to

lost profits) to the distributor on a finding “that the distributor contributed to

UNDER THE ANTIMONOPOLY ACT, (April 24. 2002), http://www.jftc.go.jp/en/legislation_gl

s/imonopoly_guidelines.files/franchise.pdf [https://perma.cc/3Z64-6LZ3].

The franchise system is defined in many ways. However, the franchise system

is generally considered to be a form of business in which the head office provides

the member with the rights to use a specific trademark and trade name, and

provides coordinated control, guidance, and support for the member’s business

and its management. The head office may provide support in relation to the

selling of commodities and the provision of services. In return, the member pays

the head office. This document is intended for businesses that fit this definition

and that have the characteristics mentioned (3) below, irrespective of what the

business is called.

Id.; see also Kozuka & Kanda, supra note 259.

262. Kozuka & Kanda, supra note 259; JAPAN FAIR TRADE COMM’N, supra note 261.

263. JFA’s Definition of Franchise, JAPAN FRANCHISE ASS’N, http://www.jfa-fc.or.

jp/particle /111.html [https://perma.cc/Q43B-D6NG] (last visited Nov. 4, 2017).

264. Kozuka & Kanda, supra note 259, at n.4.

265. Id. at n.8.1.

266. Id.

267. Id.

268. Id. at n.8.2.



the establishment of a market for the item in the territory” and could

reasonably expect to receive one year’s profits from those efforts.269

The

contract had no definitive term and the franchisor canceled only because

there was a recent slow-down in the distributor’s activities.270

In general

however, this sort of goodwill compensation is not awarded to the

franchisees.271

With Japanese case law, it seems as if as long as the

termination of the franchise contract is valid, the franchisee will not be able

to request goodwill compensation from the franchisor.

J. United Kingdom

1. Business Formula

In an effort to avoid regulating business activities, the United Kingdom

(UK) has no legislative provisions governing franchising. Thus, general

contract law is applied to franchise agreements.272

UK franchise agreements

are typically modeled in compliance with the British Franchise Association’s

(BFA) Code of Ethics, which is a slight variation on the European Franchise

Federation’s Code.273

There is also no legal, statutory, or common-law

requirement to test the business formula.274

However, in order to be a

member of the British Franchise Association, prospective franchisors need

to meet the following requirements:

“[T]o have operated at least one pilot business on an arm’s-length basis

before starting to franchise;”275

Have the legal rights or ownership of the franchise network’s

trademark, trade name, etc.;276

and

Provide the franchisee with initial training, and other assistance during

269. Takeshi Kikuchi, Agency and Distribution Agreements in Japan, in 3 INT’L AGENCY

AND DISTRIBUTION AGREEMENTS: ANALYSIS & FORMS § 2.11.2 (2011).

270. Id.

271. Id. See also Kozuka & Kanda, supra note 259, at n.14 (stating that neither Japan’s

statutory rules nor case law admits goodwill compensation to the franchisee as long as the

contract is validly terminated).

272. John Pratt, Country Report UK: Franchising, INT’L DISTRIBUTION INST. Q.1, (last

updated Oct. 2015).

273. Id. at n.1.

274. Id. at n.4.

275. Gurmeet S. Jakhu, United Kingdom, in GETTING THE DEAL THROUGH: FRANCHISE,

186 (Philip F. Zeidman ed., 2014); Pratt, supra note 272, at n. 4 (“The Franchisor shall have

operated a business concept with success for a reasonable time and in at least one pilot unit

before starting its franchise network.”). A company-owned unit can be sufficient to meet the

“one pilot unit” requirement. In order to do so, the pilot must be operated by a manager who

remains distant from the actual business in order to test the system and infrastructure. Id.

276. Id.



the contract period.277

The franchisee is not entitled to any implied rights to exclusivity absent

a clause granting it.278

English laws distinguish between granting exclusive

rights “whereby the franchisor is prevented from granting any other rights to

third parties and from itself” operating within the protected territory and sole

rights which prevent the franchisor from granting others the right to operate

in the territory, but do not exclude the franchisor from doing so.279

The

specific language of the agreements will determine which of these two rights

was granted.280

2. Goodwill

The UK has had no cases where franchisees have been entitled to a

goodwill indemnity.281

An English court might classify a franchisee as a

commercial agent and apply the Commercial Agents Regulations,282

which

recognize an agent’s claim for compensation in the actual business (local

goodwill).283

However, in practice, this argument is unlikely to convince

277. Id.; see generally European Code of Ethics for Franchising, BRITISH FRANCHISE

ASS’N, http://www.thebfa.org/about-bfa/code-of-ethics [https://perma.cc/7T7U-9FPF]

(listing requirements of a franchisor under the European Code of Ethics).

278. Pratt, supra note 272, at n.8.

279. Id.

280. Id.; Franchising: The Legal Considerations, WRIGHT, JOHNSTON & MACKENZIE LLP,

http://www.wjm.co.uk/images/uploads/2012_Franchising_-_The_Legal_Consideratio

ns_.pdf [https://perma.cc/J2ZM-MMSP] (last visited Feb. 26, 2017). It is not the case that

every franchise will confer an exclusive territory on the franchisee. However, where

exclusivity is to be granted it is very important that the word ‘exclusive’ is used in preference

to the word ‘sole’. This is not purely a matter of legal terminology; the words simply mean

different things.” As further declared, “[i]f a party is appointed the ‘sole’ franchisee in an

area, it would be interpreted to mean that while the franchisor would not appoint any other

franchisees in that area, the franchisor is not prevented from opening company owned

outlets.” Noting, as well, “[o]n the other hand, ‘exclusive’ means that the franchisee will be

protected from competition both from the franchisor itself and from other franchisees

appointed by the franchisor. In other words, the franchisor is completely locked-out of the

area.

281. Pratt, supra note 272, at Q.14; International Bar Association Legal Practice Division,

International Sales, 24 INTERNATIONAL SALES COMMITTEE NEWSLETTER, September 2007, at

28 (“There is no legal basis on which distributors can claim goodwill compensation under

either UK common law, or UK legislation. The English Court of Appeal (CoA) has held that

the European Commission Commercial Agents Directive (‘Directive 86/653’) does not apply

to distributors. English law does not permit Directive 86/653 to be applied by analogy to

justify awarding goodwill compensation to distributors. . .”) (case citations omitted).

282. Pratt, supra note 272.

283. Mark Abell & David Bond, England and Wales, in INTERNATIONAL AGENCY AND

DISTRIBUTION LAW ENG-18-20 (Dennis Campbell ed., 2001); Advantages and

Disadvantages, ENTERPRISE EUROPEAN NETWORK SCOTLAND, http://www.enterprise-europe-

scotland.com/sct/services/Advantages_and_disadvantages_.asp?savemsg=-1



English courts.284

K. Other National Perspectives

Some other countries’ perspectives must be noted. In a recent decision

in Greece, the court decided to award compensation to the franchisee not

because of franchise goodwill, but due to the expenses the franchisee must

have incurred to conserve the franchisor’s stock after the termination of the

franchise relationship.285

Interestingly, the court’s considerations of the

franchisee’s expenses stemmed from the principle that a franchisor must

terminate its contractual relationship with the franchisee in a way to protect

the franchisee from disadvantages – implying a good faith requirement.286

However, in Italy, a franchisor will not be required to buy back or indemnify

the franchisee for stock or equipment left with the franchisee after

termination, where the franchise contract provides the franchisor with merely

an option to repurchase, which was validly exercised.287

[https://perma.cc/9WS4-CW5G] (last visited Nov. 17, 2017) (“Principals need to take the

possibility of goodwill compensation into account when a contract is terminated.”).

284. Pratt, supra note 272, at Q.14. As noted by prominent English legal practitioners,

commercial agents, who may constitute franchisees, retain goodwill in their own business

(presumably what they provided as part of the agency), but not in the principal’s goods or

services, and the agent therefore has no entitlement to compensation related to the latter’s

goods or services. Abell & Bond, supra note 283, at ENG-21.

285. S. Yanakakis A. Kalogeropoulou Law Offices, Landmark case sets out franchisors’

post-contractual obligations, INT’L L. OFF. (March 29, 2011), http://www.internation

allawoffice.com/Newsletters/Franchising/Greece/S-Yanakakis-A-Kalogeropoulou-Law-

Offices/Landmark-case-sets-out-franchisors-post-contractual-obligations

[https://perma.cc/5QE2-B5HF]. See also Mark Abell, Post-Termination Non-Competes in

the European Union, THE FRANCHISE LAW., http://www.americanbar.org/publications/fran

chise_lawyer/2013/fall_2013/ post_termination_non_compete_in_europea_union.html [http

s:// perma.cc/F2NL-8KMC] (last visited Nov. 17, 2017) (“In Greece, after the expiration or

termination of a franchise agreement, the franchisee may no longer take advantage of the

franchise system, see Section 719, Greek Civil Code, and the franchisee’s freedom to compete

is subject to Greek law on unfair competition, see Article 919, Greek Civil Code; Law 146/14

on Unfair Competition. Covenants not to compete are prima facie valid unless they are

contrary to public policy. See Article 178, Greek Civil Code. Greek courts will enforce non-

compete provisions as long as they are considered reasonable and in accordance with general

principles of law, such as good faith, ethical conduct, and protection from abuse of rights.

Because there is no definition of what is ‘reasonable’ in this context, courts will determine

reasonableness on a case-by-case basis. As long as a covenant not to compete is of limited

duration and applies only to a specific restricted territory, it should be valid under Greek law.

See F.I.C. of Athens 11486/80 JCL (1981) 50,131, F.I.C. of Athens 14284/81, JCL (1982)

144, F.I.C. of Heraklion 158/86, JCL (1987) 3 Heraklion 158/86, JCL (1987) 38.”).

286. See S. Yanakakis A. Kalogeropoulou Law Offices, supra note 285. (“It is not in the

franchisor’s interests to leave it to the ex-franchisee to sell the remaining franchise products,

since the reputation and credibility of the franchising network may be affected.”).

287. Rinaldi e Associati, Buying back franchisees’ equipment: an obligation or a right?,



In Spain, franchisee recovery is not thought of in terms of franchisee

goodwill compensation, but instead is viewed as “indemnity for loss of

clientele.” This indemnity is awarded in fixed period contracts in which (i)

there has been an abusive termination of the contract, or (ii) the contract was

terminated correctly, but the parties never discussed the issue of indemnity

and the franchisor will continue doing business with the franchisee’s

clientele.288

However, this indemnity for clientele can be limited or barred if

the parties’ contract expressly prohibits this indemnity.289

II. CONCLUSIONS AND PROPOSALS

The international marketplace favors franchising as a source of foreign

investment that nonetheless creates local entrepreneurship. Issues such as

goodwill compensation and the testing of the business model are critical in

understanding franchising worldwide. Governance of these issues is not

only important for the parties involved, but also essential for protecting the

U.S. and world economies. Franchising is a vital, growing sector of the

domestic and global market. For instance, franchises in the United States

generate 10% of all U.S. jobs and contribute more than $2 trillion to the

INT’L L. OFF. (Aug. 2, 2011). See also Roberto Pera & Irene Morgillo, Italy, GETTING THE

DEAL THROUGH: FRANCHISE (2016), https://www.franchise.org/sites/default/files/upload

ed_documents/F2016%20Italy.pdf [https://perma.cc/2QS8-NDD3].

Similarly to termination by the franchisor, the franchisee may terminate in the

case of default or non-performance of the contract terms by the franchisor. The

breach must be serious, such as the franchisor unreasonably suspending the

supply of goods to the franchisee. If the franchisee terminates the agreement, it

is also entitled to the reimbursement of initial fees and costs, damages, or both.

In practice, due to the extreme difficulties of proving and quantifying damages,

franchise agreements usually grant the right for the franchisee to be reimbursed

the entrance fee, if any, or an obligation for the franchisor to repurchase the

franchisee’s stock. However, a typical franchise agreement may include a

penalty fee in favour of the franchisor if the franchisee terminates the agreement

without reasonable cause.

Id.

288. See Alberto Echarri, Compensation or Profit?, INT’L L. OFF. (May 8, 2001),

http://www.internationallawoffice.com/Newsletters/Franchising/Spain/Mullerat/Compensati

on-or-Profit?l=7U3P1XT [https://perma.cc/62FD-E274] (stating how franchisees in Spain

have a legally guaranteed right to protection of their clientele upon termination of the

franchise); Franchise in Spain, JAUSAS, http://www.jausaslegal.com/resources/doc/070816-

franchise-65260.pdf [https://perma.cc/7E5Z-TSMX] (last visited Nov. 17, 2017).

It is necessary to clearly spell out in the contract who is entitled to the goodwill.

Upon termination of the contract, especially when it has come about as the result

of a breach, there is the possibility of damages claims by the former franchisee,

against the franchiser or the new franchisee, as regards the clientele.

Id.

289. Echarri, supra note 288.



economy each year.290

In 2016, U.S. franchised businesses operated over

800,000 establishments, including franchisee-owned and franchisor-owned

establishments.291

Moreover, in certain American market sectors, such as

restaurants, lodging, and retail sales generally, franchising represents an

exceptionally large portion of the economy.292

In fact, the enormous

economic impact of franchising has been felt worldwide. As concluded in a

2016 study, “[w]ith its long history of success, franchising is a global success

story where economies from all over the world have benefitted from the

franchise model.”293

All twelve nations examined in-depth for that study

(Argentina, Australia, Brazil, Canada, China, Colombia, India, Indonesia,

Mexico, South Africa, United Kingdom, and Vietnam) showed rapid

progress, typically far outpacing economic growth generally. To take one

key example, in 2009, China’s number of franchise systems increased in just

one year by 15 percent.294

By 2016, China’s top 100 franchises alone

generated total annual sales equating to $66 billion.295

China now has over

4,500 franchise networks,296

even more than the grandfather of franchising,

the United States.297

290. See PRICEWATERHOUSECOOPERS LLP, THE ECONOMIC IMPACT OF FRANCHISED

BUSINESSES: VOLUME IV, I-14-15 (Sept. 15, 2016), https://www.franchise.org/site

s/default/files/Economic%20Impact%20of%20Franchised%20Businesses_Vol%20IV_2016

0915.pdf [https://perma.cc/23Z8-KFZN] (concluding that franchised businesses directly or

indirectly generated 16,077,500 jobs (nearly nine million of those employees being directly

employed by franchised businesses), accounting for 10.1 percent of all U.S. private non-farm

employment, and produced $2.1 trillion of annual output (6.8 percent of all private non-farm

output) and $1.2 trillion in Gross Domestic Product (7.4 percent of all private non-farm

GDP)).

291. These employers met a $351 billion payroll, produced $868 billion of output and

added over $541 billion of gross domestic product. Id. at I-14.

292. Franchises constituted 53.1 percent of U.S. quick service restaurants (“QSR”) and

21.1 percent of hotels, motels, or other lodges, with even higher percentages of franchise-

related employments for those sectors; franchises accounted for 68.5 percent of QSR

employees, 29.1 percent of lodging employees, 18.0 percent of table/full service restaurant

employees and 8.0% of retail food employees. Id. at I-9. Elsewhere in the world, while

generally similar to the U.S. industry proportions, in part because of American franchisors

expansion internationally, various sectors may be more or less likely to have a large

proportion of franchised businesses than in the United States. This, though, has little, if any,

effect on the franchise law issues.

293. U.S. INT’L TRADE ADMIN., 2016 TOP MARKETS REPORT: FRANCHISING, 5,

http://www.trade.gov/topmarkets/pdf/Franchising_Top_Markets_Report.pdf

[https://perma.cc/23WK-USFP].

294. Thomas Leclercq & Guillaume Smitsmans, Franchising in China: Overview and

Opportunities, THIRD PLACE (Dec. 17, 2012), http://www.third-place.be/wp-content/uploa

ds/2012/12/Franchising-in-China-Whitepaper-by-Third-Place-Franchise-Consulting.pdf

[https://perma.cc/CSS7-HY92].

295. U.S. INT’L TRADE ADMIN., supra note 293, at 19.

296. Id.

297. See FAQs, SUMMIT FRANCHISES, http://www.summitfranchises.com/faqs.php



Legislative, regulatory, and case law expansion has come on the heels

of the surge in franchising. While the criteria for what constitutes a franchise

are not uniform, the franchise relationship is defined similarly in all nations.

Typically, a franchisor will license a franchise’s know-how or trademark to

the franchisee, while exercising substantial control over the franchise’s

marketing plan, in exchange for a start-up fee from the franchisee.298

With

unanimity on the broad outline of the franchise’s legal architecture (the

contract) and operations (how the franchise relationship is built and

maintained), courts, legislators, and regulators should look to require, or at

least strongly encourage, franchising’s indisputably positive “best

practices.” Among them are the use of pilot units before franchising begins

and the structuring of goodwill compensation mechanisms to encourage

network-friendly, productive franchisee and franchisor behavior during the

course of the franchise relationship.

A. Testing the Business Formula

Most nations do not require that a prospective franchisor test its

franchise business model before selling franchises. However, a minority of

countries require this business formula testing.299

Chinese law explicitly

requires such testing,300

and other countries, while lacking such an explicit

legal requirement, have, for example, code of ethics norms,301

case law,302

or

[https://perma.cc/HA65-4THT] (last visited Nov. 17, 2017) (finding, conservatively, more

than 3,000 different U.S. franchise networks in over 70 different industry categories).

298. Emerson, supra note 91, at 594-98 (discussing the definition of a franchise

relationship).

299. Consider Italy as an example. Its franchise law, enacted on May 6, 2004, states that,

for a business to establish a franchising network, it must have tested on the market its

“commercial formula.” L. n. 129/2004 (It.) (Article 3(2)).

300. See supra notes 74-76 and accompanying text (containing the regulations of

commercial franchising operations per Chinese law).

301. Article 2.2 of the European Code of Ethics for Franchising provides, “[t]he

Franchisor shall . . . have operated a business concept with success, for a reasonable time and

in at least one pilot unit before starting its franchise network[.]” EUR. FRANCHISE FED’N, EUR.

CODE OF ETHICS FOR FRANCHISING, art. 2.2, at 2-3 (Dec. 5, 2003), http://www.franchise-

fff.com/base-documentaire/finish/206/327.html [https://perma.cc/EP8D-GGCA] (reported at

the website for the French Franchise Federation - Fédération Française de la Franchise)

(hereinafter, “EUR. CODE OF ETHICS FOR FRANCHISING”). In a supporting note, the code states,

“[i]t is the duty of the franchisor to invest the necessary means, financial and human, to

promote his brand and to engage in the necessary research and innovation to ensure the long-

term development and continuity of his concept.” Id. at 6 (note 5) (French Franchise

Federation (“FFF”) extensions and interpretations of June 14, 2011).

302. See supra notes 100-101 and accompanying text (discussing French case law on

commercial franchising operations); Emerson, supra note 91, at 620 (discussing know-how

and pilot establishments under French franchise law).



franchise organization membership prerequisites303

that do require or imply

the testing of business formulas. At the very least, even without a legal

mandate, having a test run of franchise-like, independently-managed pilot

units is a “best practice” for prospective franchisors preparing to market

franchises. Discussing the need to have a “proven format,” a noted British

entrepreneur and business commentator wrote:

Even if you have run company-owned branches for years, you must be

aware that things will change when you franchise and you must be prepared

to run pilot units at arm’s length. . . . Pilot units should, of course, mirror the

proposed franchised outlet as far as possible in terms of size, location,

catchment area, population profile, staffing and so on. . . . Ideally, you

should pilot the concept in two or three places for at least one complete

trading cycle. . . . Pilot units also give you the opportunity to write the

manual from practical experience rather than theory.304

Running pilot units is thus a fundamental aspect of building and

maintaining the franchise network’s know-how.305

It is the franchisor’s

responsibility to maintain and develop know-how, which it in turn transfers

to the franchisee306

for the good of the entire franchise system, not merely

individual franchisees.307

In essence, not to run pilot units, or to perform

some equivalent action before selling franchises, is unethical. For a

prospective franchisor that is thinking long-term, it is also highly foolish.

Indeed, the record of franchising laws and practices to this point seems to

indicate there would be little, if any, opposition to making pilot unit

operations a default step franchisors ordinarily must take before selling to

franchisees.

B. Protecting the Goodwill

1. Network Goodwill versus Local Goodwill

Nearly all franchise contracts contain clauses demarcating the

303. See supra note 275-277 and accompanying text (discussing the British Franchise

Association standards).

304. Brian Duckett, Turning your business into a franchise, FRANCHISE WORLD,

http://www.franchiseworld.co.uk/archives/661 [https://perma.cc/7QCR-M6C9] (last visited

March 2, 2017).

305. See EUR. CODE OF ETHICS FOR FRANCHISING, supra note 301, at 5 (explaining the

flow of information from the franchisor to the franchisee and back again that is guaranteed in

the franchisor’s right to “know-how”).

306. Id.

307. See Emerson, supra note 91 (arguing that the basic concept of savoir faire found in

many nations’ franchise jurisprudence should be applied, either overtly or at least in its effects,

in U.S. franchise cases and legislation).

http://www.franchiseworld.co.uk/archives/661



franchisor’s ownership of the trademark and concomitant restrictions on a

franchisee’s use of the trademark.308

Studies and individual experience

indicate that the vast majority of franchise agreements likely contain clauses

in which the franchisor states that it has developed the goodwill for the

benefit of the franchise system and thereby designates control over the

franchisee’s behavior as necessary to protect the goodwill.309

For example,

Pizza Hut’s franchise agreements state that “[franchisor Pizza Hut

International – ‘PHI’] is the sole and exclusive owner of the Pizza Hut

Marks. . . All goodwill now or in the future associated with and/or identified

by one or more of the Pizza Hut Marks belongs directly and exclusively to

PHI.”310

Like Pizza Hut International, most franchisors establish their

ownership stake in the goodwill by providing that all emanations from the

original franchise goodwill belong to the franchisor, even if the franchisee

developed the new idea in question.311

For example, “The Big Mac®, Filet-

O-Fish® and Bacon & Egg McMuffin®” were generated by McDonald’s

franchisees around the world.312

The law of franchise goodwill should note the differences between the

franchisee’s handiwork and that solely ascribed to the franchisor’s

trademark. Just as American franchise law sometimes distinguishes between

types of goodwill,313

French law separates the ideas of “national goodwill”

308. See Emerson, supra note 17, at 693 (featuring the results of a survey of 100 U.S.

franchise agreements in 2013 which found that 96% had restrictions on the franchisee’s use

of the franchise system’s trademark and that 81% required a terminated franchisee to return

to the franchisor all trademarked supplies, signs, stationery, forms or other materials – both

figures were nearly the same in a survey of 100 U.S. franchise agreements twenty years earlier

– 95% and 78%, respectively).

309. Id. at 697 (featuring the results of a survey of 100 U.S. franchise agreements in 2013

which found that 95% had a provision on goodwill).

310. PIZZA HUT, INC. LOCATION FRANCHISE AGREEMENT, at p. 5, para. 3.3 (“OWNERSHIP OF

PIZZA HUT MARKS”) (filed with California’s Department of Corporations on Oct. 18, 2005)

(on file with author).

311. Emerson, supra note 17, at 694 (featuring the results of a survey of 100 U.S.

franchise agreements in 2013 which found that 55% declared that all franchisee concepts

become the franchisor’s exclusive property, a figure remarkably higher than the 3% bearing

such a declaration in 100 such agreements from 1993).

312. Franchisees Opportunities, MCDONALD’S NEW ZEALAND, https://mcdonaldsco.n

z/franchise-opportunities [https://perma.cc/MX5V-4EZ7] (last visited Jan. 24, 2017).

313. In some states, the franchise relationship laws “may reflect the perception that a

franchisee also develops a local and personal goodwill in the business, often called ‘sweat

equity,’ . . . [that] is separate and distinct from the goodwill inherent in the licensed

trademarks.” Bundy & Einhorn, supra note 31, at 183, 216; see supra notes 8–12 & 30-32

and accompanying text (concerning locational, reputational, and brand goodwill). Both courts

and statutes support the separation of goodwill into different categories. See HAW. REV. STAT.

ANN. § 482E-6(3) (LexisNexis 2010) (stating that the franchisor must compensate the

franchisee for the loss of goodwill if the franchisor refuses to renew a franchise for the purpose

of converting the franchisee’s business to one owned and operated by the franchisor);



belonging to the franchisor and “local goodwill” belonging to the

franchisee.314

The franchisee generates local goodwill by investing his or her

time, effort and capital.315

Local goodwill contributions strengthen the

reputation of the national product or service.316

Courts and lawmakers

acknowledge, “local goodwill necessarily becomes established in the minds

of the public toward a particular business at a particular location.”317

For

example, a customer may go to a specific franchisee location because of the

friendly, efficient employees of that franchisee or the specific site of the

business. Positive experiences with one franchisee may encourage a patron

to visit the same franchise at other locations and thus become a supporter of

the franchise network, not just the franchisee initially patronized. On such

occasions, it is the franchisee’s assets that are used to attract the customer to

the franchisor and then retain his staunch support. Here are three examples

of franchisee work leading to local customers who may, nonetheless, identify

as franchise-faithful, not forever franchisor or franchisee steadfast: (1) the

franchisee often has selected the location where the franchise does business;

(2) the franchisee typically maintains the stock and equipment and certainly

sells the actual goods or services that the customer seeks; and (3) the

franchisee is responsible for hiring, training, and supervising the franchised

unit’s employees, who in turn often “make or break” the customer

experience, and create or destroy any corresponding loyalty to the franchise

brand.318

Recognition of franchisee goodwill helps to stymy potential abuse of

the franchise relationship and to produce a more balanced, fairer network of

both centralized power (the franchisor, the brand, the network as a whole)

and of local owner-operators (franchisees). Otherwise, “[b]y exercising [or

LaGuardia Assocs. v. Holiday Hosp., 92 F. Supp. 2d 119, 125 (E.D.N.Y. 2000) (“[T]he

franchisor is essentially lending its national goodwill to the franchisee [and t]he franchisee . . .

generates local [customer] goodwill.”).

314. Cour de cassation [Cass.] [supreme court for judicial matters] 3e civ., Mar. 27, 2002,

Bull. civ. III, No. 00-20732 (Fr.) (known as the Trevisan judgment); see also Cour d’appel

[CA] [regional court of appeal] Chambery, com., Oct. 2, 2007, No. 06-1561 (Fr.) (another

unusually well-known case, called SA Andey c/ SAS Vanica.

315. LaGuardia Assocs. v. Holiday Hosp. Franchising, Inc., 92 F. Supp. 2d 119, 125

(E.D.N.Y. 2000).

316. Id.

317. Benjamin A. Levin & Richard S. Morrison, Who Owns Goodwill at the Franchised

Location?, 18 FRANCHISE L.J. 85 (1999); see, e.g., Shakey’s, Inc. v. Martin, 430 P.2d 504,

509 (Idaho 1967) (explaining goodwill initially associated with the mark “becomes

established in the minds of the public who patronize the establishment”); Hill v. Mobile Auto

Trim, Inc., 725 S.W.2d 168, 171 (Tex. 1987) (“[T]here exists not only business goodwill but

also franchisee goodwill.”).

318. Cour de cassation [Cass.] [supreme court for judicial matters] 3e civ., Mar. 27, 2002,

Bull. civ. III, No. 00-20732 (Fr.).

https://a.next.westlaw.com/Link/Document/FullText?findType=Y&serNum=1967128072&pubNum=661&originationContext=document&transitionType=DocumentItem&contextData=(sc.Search)#co_pp_sp_661_509






threatening to exercise] its termination power, the franchisor can unfairly

capitalize on local goodwill built up by the franchisee through its investment

of capital and labor.”319

If the franchisee has built up favorable local

goodwill, customers will continue to frequent the franchise establishment,

even once the ex-franchisee has stopped managing it. To avoid this injustice,

franchising’s statutory, regulatory, and case law framework should take a

more active approach to protecting franchisees.

2. Franchise Contract Clauses, Termination, and Goodwill

Franchise contract clauses evidence the unequal bargaining power that

exists when franchisees enter into franchise agreements.320

A California

court characterized the issue as follows:

The relationship between franchisor and franchisee is characterized by a prevailing, although not universal, inequality of economic resources between the contracting parties. Franchisees typically, but not always, are small businessmen or businesswomen. . . seeking to make the transition from being wage earners and for whom the franchise is their very first business. Franchisors typically. . . are large corporations. The agreements themselves tend to reflect this gross bargaining disparity. Usually they are form contracts the franchisor prepared and offered to franchisees on a take-it-or-leave-it basis.

321

Furthermore, courts have acknowledged that franchise agreements

strongly resemble consumer contracts, although in fact they are commercial

contracts.322

Modern courts acknowledge that most individuals do not read

319. Boyd Allan Byers, Making a Case for Federal Regulation of Franchise

Terminations—A Return-of-Equity Approach, 19 IOWA J. CORP. L. 607, 621 (1994).

The franchising structure lends itself to franchisor opportunism . . . The

franchisee’s sunk investment also permits the franchisor to engage in

opportunism short of actually exercising its termination power, as the threat of

termination itself enables the franchisor to appropriate a portion of the

franchisee’s sunk investment for itself.

Id.

320. Emerson, supra note 17, at 657-59 (reviewing the numerous, strongly pro-franchisor

terms of most franchise agreements, which can permit franchisors to exercise a large measure

of opportunism throughout the life of the franchise relationship).

321. Postal Instant Press, Inc. v. Sealy, 43 Cal. App. 4th 1704, 1715-16 (Cal. Ct. App.

1996) (citing Robert W. Emerson, Franchising and the Collective Rights of Franchisees, 43

VAND. L. REV. 1503, 1509 & n.21 (1990)).

322. Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1282 (9th Cir. 2006). This is only in

some courts, of course, and treating franchisees as consumers is notable for being just a

minority of the cases. Also, worldwide, legislatures have tended to avoid this approach, with

one prominent exception: South Africa. See Emerson, supra note 76, at 462-63 (noting that

the history and effects of apartheid in South Africa helped lead to passage of that country’s



consumer contracts, and especially do not negotiate over their terms.323

To

add to this disparity, most franchisees do not employ the assistance of

attorneys when signing these documents and “contracting” for their rights.324

Many courts recognize that most franchise agreements are drafted to

protect the franchisor’s interests. This often results in courts defining the

purpose of franchise laws as the protection of franchisee rights from the

franchisor’s contractual prowess. For example, Canadian courts impose

serious consequences on franchisors that do not comply with disclosure

requirements.325

More generally, countries have increasingly invoked

agency law principles to even, as they see it, the franchise playing field.

German law offers insight on how such pro-franchisee court holdings may

ensue once legal authorities accept that a crucial role of franchisors is to

provide support for the franchisee in running a business and earning

revenues.326

Courts in turn favor the franchisee by holding the franchisor

liable for any damage to the franchisee’s financial existence that results from

the franchisor permitting other franchisees to compete in the same

2008 Consumer Protection Act, which explicitly classifies franchisees as consumers and

bestows upon franchisees a bundle of rights exceeding that of other national franchise laws).

323. Todd D. Rakoff, Contracts of Adhesion: An Essay in Reconstruction, 96 HARV. L.

REV. 1174, 1179 & n.22 (1983) (reporting that over the previous few years, he had asked

many lawyers and law professors “whether they ever read various form documents, such as

their bank-card agreements; the great majority of even this highly sophisticated sample do

not”).

324. Robert W. Emerson, Fortune Favors the Franchisor: Survey and Analysis of the

Franchisee’s Decision Whether to Hire Counsel, 51 SAN DIEGO L. REV. 709 (2014). See

Robert W. Emerson & Uri Benoliel, Are Franchisees Well-Informed? Revisiting Debate over

Franchise Relationship Laws, 76 ALB. L. REV. 193, 215-216 (2013).

Franchisees ignore disclosure documents, do not compare various franchise

opportunities, and refrain from consulting with a specialized franchise attorney.

Given this reality, theoreticians and legislators interested in creating franchise

laws that protect novice franchisees from possible opportunism by franchisors

must cast doubt on the assumption that franchisees are sophisticated, well-

informed business people and incorporate into their analyses a more

representative conception of franchisee behavior. The assumption that

franchisees consider all relevant information before signing a franchise contract

has little theoretical or empirical support in actual practice, and thus the door is

open to reconsidering the adoption of franchise relationship laws.

Id.

325. Brad Hanna, Les Chaiet & Jeffrey Levine, Canada, in INTERNATIONAL FRANCHISING

CAN/14 (Dennis Campbell ed., 2d ed. 2011).

326. See Hero, supra note 216, at 9 (noting the franchisor has a “business promotion

obligation . . . geared towards supporting the franchisee” in advancing the franchisee’s “aim

of running a system business and earning revenues”; to do that, the franchisor must, inter alia,

protect franchisees from the existential threat of other franchisees’ competition, furnish to

franchisees advice and information, and otherwise refrain from “actively frustrating”

franchisee goals).



territory.327

This trend of favoring the franchisee should, as a matter of fairness and

efficiency, continue into the context of goodwill compensation upon

termination of the franchise relationship.

Although most countries do not recognize goodwill compensation to

the franchisee, there are a few exceptions. In the United States,

compensation is only recognized in cases in which the franchisor has

violated the parties’ franchise agreement.328

However, goodwill has come to

be known as a distinct “asset” separable from the franchise or trademark it is

associated with – perhaps evincing a mindset that goodwill is an item for

which parties should be compensated.329

Additional exceptions are France,

which recently recognized franchisees’ claims to goodwill compensation,330

and Australia, which distinguishes between business goodwill belonging to

the franchisor and local goodwill belonging to the franchisee.331

Other

countries, such as China, do not explicitly address goodwill under franchise

laws, but instead do so under agency principles.332

These countries apply

similar standards when determining whether the agent (franchisee) can

recover for goodwill: mainly, (1) that the franchisee increased the franchisors

clientele; (2) that the franchisor benefitted from this substantially; (3) that

the franchisee has lost commissions or payments from this increased

clientele; and (4) that, under the circumstances, it is fair and equitable to

award goodwill compensation to the franchisee. This is a standard suitable

for American franchise law adjudication, arbitration, regulation, and

327. Id.

328. See supra Part I.A.2. (discussing the difference of goodwill treatment by American

state courts, explaining that while some do not require the franchisor to repurchase goodwill

upon termination of the agreement unless the franchisor was the party at fault, others hold that

franchisors must always pay for the local goodwill the franchisee created during the contract).

329. Irene Calboli, Trademark Assignment “With Goodwill”; A Concept Whose Time Has

Gone, 57 FLA L. REV. 771 (2005).

330. See supra Part I.C.2. (explaining that historically under French law the goodwill in

a franchise remained with the franchisor, but around 2000 France began recognizing the

franchisee’s right to goodwill with several new cases, the most influential being Sarl Nicogli

Le Gan Vie SA).

331. See supra Part I.F.2. (explaining that because Australian law views goodwill as a

derivative product of a recognized trademark, specific location or the reputation of the

business, it is an asset in its own right, and one that requires the courts to distinguish the

sources of the goodwill to then properly assign its ownership to either the franchisor (declaring

it predominantly business goodwill) or the franchisee (declaring it predominantly local

goodwill)).

332. See supra Part I.B.2. (explaining that because Chinese law does not provide for

compensation beyond damages, it is up the parties to provide said compensation by the terms

of the contract between them, and since China’s agency laws, the only Chinese of body of law

which govern franchises, also defers greatly to the importance of contract terms, any right to

goodwill must be included in the contract).



legislation.

3. A Presumption in Favor of Franchisee Compensation

Adoption of a uniform, international standard for the treatment of

goodwill in franchising could be a boon for franchisors, franchisees, and

world commerce generally. Even without legislation or regulation,

improvement is possible: As adopted in dispute resolution or jurisprudence,

the modern, more general view that often favors franchisees can contribute

to an international consensus about the treatment of franchisee goodwill.

Therefore, while it is unrealistic to expect universal franchise laws when

countries value consumerism and freedom of contracting at different rates, a

customary approach to goodwill may prevail in light of current trends

recognizing the disparities in the franchise relationship. The Model

International Franchise Contract (“MIFC”), written by a European-based

organization, issued revised rules containing an introductory remark that

indicated “courts may in some exceptional cases find a way to grant the

franchisee a goodwill indemnity or similar remuneration in case of contract

termination. . .”333

That recognition of heightened franchisee rights, while

limited to “some exceptional cases,” signifies an ongoing shift in the

attitudes of business leaders, jurists, and scholars toward reimbursing

franchisees for lost goodwill.

This Article proposes that all courts raise a presumption favoring

goodwill compensation in the franchisee’s favor when the franchise

relationship is terminated. This presumption can be rebutted by the franchise

agreement expressly containing a provision related to goodwill treatment

upon cessation of the relationship, with special clauses related to termination

due to bad faith actions (e.g., trademark infringement) by the franchisee.

Where the franchise relationship is largely governed by the parties’ franchise

agreement, and thus typically favors the franchisor (evinces the franchisor’s

“upper hand”), a presumption in favor of the franchisee would help level the

playing field. Considering the one-sided nature of franchise form

contracts,334

this presumption would be especially important for businesses

333. International Chamber of Commerce, Model International Franchising Contract 15

(2011) (discussing rules protecting the franchisee).

334. See Emerson, supra note 17, at 657-59, 689-93 & 696-701 (reviewing examples of

the numerous, strongly pro-franchisor terms in most franchise agreements, and providing an

appendix featuring surveys of franchise contracts from 1971, 1993, and 2013 showing over

time an even greater pro-franchisor slant in most franchise contract terms, such as fees,

indemnification, territories, site selection and layout, operating standards, prices, supplies,

inspections, intellectual property, advertising, leases, non-compete covenants, and franchise

transfers and assignments); Emerson, supra note 8, at 366-367 (citing numerous

commentators and empirical studies for the proposition that franchise agreements tend to be



operating internationally; these businesses now could expect consistent

treatment across borders, and – in reliance on the new standards – these

businesses could maintain stable, finely calibrated, even standardized

business operations regardless of the location. Furthermore, a universal

presumption of awarding goodwill to franchisees upon termination of the

franchise relationship would encourage franchisors to contractually protect

goodwill rights, rather than depend upon courts to allocate compensation.

Certainly, the bargaining power of franchisors could outweigh the

courts’ presumption in favor of franchisee goodwill. However, pro-

franchisor contract provisions may not simply doom a presumption. First,

concepts of good faith and fair dealing would still apply,335

and franchisee

advocates could challenge a franchisor’s crafting and enforcement of such

clauses, whether in litigation or arbitration, in regulatory or legislative

processes, or in the court of public opinion. Compelling franchisors to

allocate more fairly the goodwill generated by all the franchisor network

strongly tilted in favor of franchisors, that they are long and usually opaque, and – as with

most such form contracts – are not carefully read, let alone negotiated, by the party (the

franchisee) subjected to these agreements’ often onerous terms).

335. See W. Michael Garner, 2 Franchise and Distribution Law and Practice § 8:1 (2017)

(stating that under U.S. law, “[m]odern franchise and distribution relationships are usually

based upon agreements that include the written agreements between the parties, their oral

agreements, the custom of the trade and course of dealing between the parties, statutory law,

and the implied covenant of good faith and fair dealing” (emphasis added)); Robert W.

Emerson, Franchising and the Parol Evidence Rule, 50 AM. BUS. L.J. 659, 723 & n.298

(2013) (citing many American cases for the proposition that the franchise relationship creates

implied covenants of good faith and fair dealing). The franchise parties’ duties of good faith

and fair dealing toward one another (franchisor and franchisee) are found in franchise law

worldwide. It extends to the Civil Law nations, Babette Märzheuser-Wood, Drafting

Franchise Agreements in Civil Law Jurisdictions, in FUNDAMENTALS OF INTERNATIONAL

FRANCHISING 317, 321 (Will K. Woods, 2d ed., 2013) (citing numerous Civil Code

jurisdictions, noting that a “general obligation of ‘good faith’ will be implied into the

[franchise] contract by most civil codes,” and stating that the good faith duty in the Civil Law

nations covers both performance of the contract as well as pre-contractual negotiations);

Emerson, supra note 216, at 188 & n.138 (The Civil Code, found in French law). It also

extends beyond the United States to all other common law countries. See JENNY BUCHAN,

FRANCHISEES AS CONSUMERS: BENCHMARKS, PERSPECTIVES AND CONSEQUENCES 158 (2013)

(noting that “fairness” and “good faith” are the standard for evaluating Australian franchise

contracts, yet may be inadequate for protecting franchisees of failing franchisors); Mohd

Bustaman Hj Abdullah & Wong Sai Fong, Malaysia, in INTERNATIONAL FRANCHISE SALES

LAWS 343, 360 (Andrew P. Loewinger & Michael K. Lindsey eds., 2d ed. 2015) (“Section 29

of the [Malaysia Franchise] Act provides that the Franchisor and Franchisee must act in an

honest and lawful manner and must endeavor to pursue the best franchise business practices

under the circumstances”); Emerson, supra note 76, at 473, 476, 479 & 481 (noting the good

faith and fair dealing franchise law concepts found in South African law, as well as, in order,

the law of France, Australia, and China); Snell, Weinberg & Mochrie supra note 153, at 128-

29 (discussing the substantive law requirements for franchise contracts that are found in the

provincial legislation in Canada and that imposes a duty of fair dealing in franchising).



participants (franchisors and franchisees alike) may actually result from

these three factors counteracting the franchisor’s freedom simply to declare

its absolute ownership of all franchise-related goodwill: (1) disclosure

obligations about who owns the goodwill, both under the law and – when

applicable - under a contract provision; (2) transparency via social media and

other Internet-based information; and (3) competition among franchisors

seeking to attract and retain franchisees. Such protection will promote

maintenance of business relationships as well as encourage terminated

franchisees to continue their business ventures.

Courts should raise a presumption in the franchisee’s favor while

allocating goodwill compensation upon the franchise relationship’s

termination. This approach permits the parties to make market choices, to

draft contract terms according to their needs, yet subject to standards meting

societal notions of fairness and equity. As customers acquire loyalties to a

brand but also, more particularly, a franchised business, the reward for those

clientele memories should be rights, or at least presumptions, favoring that

business when the franchisor severs the business’ connection to the brand.

The franchisee should receive from the terminating franchisor more than

mere thanks for those memories – those valuable ties to customer loyalty -

that the franchisee has helped to create. Legal presumptions should favor

franchisee compensation from the franchisor for the goodwill accruing to the

franchisor, or now lost to the franchisee, or both, when the franchise is

terminated.

robert w. emerson

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